Considering the company’s international appeal, it should come as no surprise that over time Gerber made the decision to expand its offerings and started developing products to serve families in the latter stages of their children's lives.
One such product is the Gerber Life Grow-Up Plan.
The Gerber Life Grow-Up Plan is a whole-life insurance policy that “helps protect your child while saving for the future.” Now, if you’ve followed Your Financial Mom for a while, you are probably familiar with Pam’s take on Whole-Life insurance. But before we completely dismiss this plan as a viable option for college savings, let’s dig a little deeper into the details.
Their Heart is in the Right Place
When a baby is first born, among the most pressing financial concerns of their parents are diapers, clothes, formula, and perhaps daycare. But as they get older, things change and expenses like education funding begin to take priority over onesies and walkers.
Deciding how much money is necessary for higher education, and where that money is coming from is a big question that many parents struggle to answer. Enter the Gerber Grow-Up Plan.
Parents can select a whole life insurance policy on a healthy child ages 14 days through 14 years old with a death benefit between $5,000 to $50,000. The premiums are low, and can range from around $3.00 per month for the smallest amount of coverage on a newborn, up to around $5.00 per month for the same coverage on a 14-year-old.
The policy stays in place for as long as the premiums are paid (including into adulthood), in fact, the coverage amount doubles automatically when the child turns 18. As long as the premiums are paid, the policy can’t be cancelled.
Does A Child Really Need Life Insurance?
The general rule of life insurance is that it is only needed if the death of the insured party would cause a financial hardship. Typically this means only the breadwinner(s) and/or primary caregiver would need coverage.
Newborns and young children hardly ever fall into either of those categories -- except in the rare case of child stars.
With whole life insurance, the policy isn’t for a set period (like term-life) but rather for the rest of your (whole) life. As a result, the premium is much higher than that of a term policy. And, although whole-life insurance offers an investment component that could grow your balance, chances are you could earn a better return on your money by seeking out other products.
Let’s take a look at an example:
The Smith’s have three young children -- ages 1, 10, and 14. When each child was born, their grandparents purchased a $5000 Gerber Grow-Up Plan. However, in calculating the total amount of premiums paid for the Smith's, it would appear that the plan is simply not worth it.
- 18 years of monthly payments of $3.77
- Average interest rate: unknown
- Total cash value of the policy: based on the date the policy is cashed in
- Surrender charges: unknown until date of surrender
I compared the present value of the monthly premiums to the cash value at surrender for a one-year-old, 10 year-old, and 14 year-old child.
In each case, the value of total premiums paid today is not equivalent to the present value amount of insurance that was chosen. The value of those payments today are very close to the surrendering cash value without applying surrendering charges.
Of course, if you decide to go with the Grow-Up plan and something happens to your child before they turn 18, the policy would pay out in the same way that any other insurance policy would.
If you plan to use the money for college there will be problems when trying to receive cash value and these problems are not mentioned in the plan brochure. First, the cash value would only be about $800 or less, depending on the surrender charges. Second, while this money may be used for education related expenses, unlike traditional college savings plans, the Gerber Grow-up option does not create any tax advantages.
In addition, I also found that after several years of having this policy, the accumulated surrender value will grow at an accelerated rate that is not listed in the brochure/application. This means that you will not know how much your surrender charges are until you decide to cash in your policy. By the time you spent all your money on paying premiums and adding that to the surrender charges, the policy’s cash value will be close to nothing.
Let’s take a look at another example of a family that choose to go a different route:
The Jones’ have one child and decided to start saving money in a 529 plan -- instead of the Gerber Grow-Up plan. They set up the account when their child was one year old and contributed the same monthly premiums over the course of eighteen years.
- 18 years of monthly deposits of $3.77
- Average interest rate of 3%
- Total amount in their 529 College Savings Plan:$1,078.00
With a moderate return of only 3%, at the end of the eighteen years, the Jones’ end up with more than the cash surrender value of the Gerber policy and they don’t have any surrender charges. Their funds have grown tax free when used for educational purposes.
If funding your child’s education is truly your priority, using a 529 Plan as a tool for college savings is a better option the the Gerber Grow-Up plan. These college specific accounts can grow over the years and have little to no penalties when being pulled out. Life Insurance policies, on the other hand, are not meant for this purpose -- no matter what the marketing material says.
In conclusion, the Gerber Life Grow-Up Plan is probably not the best investment to make when starting to save for higher education. Instead, it is best to research options that have the potential to generate decent returns, while minimizing risk and expenses.
Are you a parent or grandparent looking to save for future education related expenses? We should talk! Click here to learn more about the benefits of working with a Certified Financial Planner® and schedule a complimentary meeting to discuss your specific situation.
Pamela J. Horack, CFP® of Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.