Let me make this as clear as possible, YOUR CHILD DOES NOT NEED LIFE INSURANCE! There is not one valid argument that a person could make to convince me to purchase life insurance for my son. 90% of people need life insurance because if they were to pass away, the life insurance helps supplement lost income. 10% of people need life insurance for other reasons such as paying estate taxes, selling a business if an owner were to die, etc. Your child does not fit into either of these categories. Life insurance is almost always a very bad investment, and for a child it is absolutely non-sense.
I have a two-year old and if something happened to him I would be devastated, so this is a subject that is very difficult to talk about. That being said, if something were to happen to my son, financially I would not be worse off. My son does not bring in income, and unless your children are Disney stars, there is a good chance that yours don’t either. And no, your son does not need life insurance to help supplement that summer lawn mowing gig. Again, something that no parent would ever want to consider but if something happened to my son, my family would not be worse off financially. This is just one of many reasons that the Gerber Life College Plan is one of the worst college savings options out there.
The Gerber Life College Plan is really life insurance sold as a college savings plan. A person will make monthly payments until the child reaches 18, and at that point a predetermined amount will be available. Gerber claims an advantage of the plan is that the child can then spend the money on anything and it’s not tied to college costs like a 529 Plan. Of course the reason is that unlike a 529 Plan, the Gerber College Savings Plan offers no tax benefits. Gerber Life is a life insurance company so there is life insurance involved too. If your child were to pass away prior to reaching 18 the parents would receive a life insurance settlement.
Let’s revisit the 5 traits of awful investments and see how many apply to Gerber Life College Plan.
High fees: Yes, your child is purchasing life insurance that he does not need.
Low returns: We’ll discuss more later, but yes they are awful.
Pay fees to access your money: Yes, your surrender period is 1/2 of the contract length. The contract length is 18 minus your child’s current age.
Confusing investment terms: No, you pay a set amount each month and get a set amount back when the child is 18
Company with a poor legal record: No, but do you really want the company that sells you baby food to sell you life insurance?
The worst things about the Gerber Life College Plan is that you get a very low rate of return and to get this low rate of return, you have to lock your money up for a significant period of time. Well, that sounds pretty awful, let’s look at the numbers. According to the Gerber website if my 2 year old son saved $109.73 per month for the next 16 years he will have, wait for it…$25,000 at age 18. This is a 2.09% compounded annual return for the next 16 years. For reference, I could buy a 16 year U.S. Treasury Bond, the safest investment in the world, for about 2.50% today. Also, to get this crummy 2.09%, I would have to lock up my money for the next 8 years and be forced to make premium payments or I will have a surrender charge. And for good measure, I have to pay taxes on these paltry gains. Honestly, how bad of an investment does this sound? Let’s compare this Gerber Life College Plan to let’s say a 529 plan, in which your money grows tax free.
|Investment||Taxable?||Rate of Return||Value after 16 years|
|Gerber Life College Savings||Yes||2.09%||$25,000|
|Michigan 529 Plan||No*||4.00%||$29,445|
|Michigan 529 Plan||No*||6.00%||$35,233|
|Michigan 529 Plan||No*||8.00%||$42,488|
*If used for college expenses
These numbers assume that you invest $109.73 per month for 16 years. Of course, the Michigan 529 plan involves risk and can go up and down in value, but these rates of return shown are fairly conservative for a long-term investment.
The biggest benefit of the Gerber Life College Plan is that you have a set amount at age 18 which is not subject to market fluctuations. Yet, can you really afford to pay for college earning 2% per year, when college costs have been going up over 5% per year? 529 savings plans typically don’t have a guaranteed investment return but I would expect you would do a whole lot better than 2% per year over a 16 year period.
It is important to remember that Gerber Life Insurance is a life insurance company. Like every life insurance company, Gerber believes that you can solve any financial problem with life insurance. Estate Planning? Life Insurance. Invest for retirement? Life insurance. Save for college? Life insurance. Why does Gerber think it is a good idea to sell life insurance to your child? Because Gerber is a life insurance company, and Gerber sells life insurance, if you need it or not. Trust me, your kids don’t need it.