If you have looked up baby stuff online recently, the clever algorithms that convert search terms into marketing data probably have presented you with countless ads for the Gerber Grow-Up Plan. Targeted to new parents, the Gerber Grow-Up Plan is a whole life insurance policy you can purchase for your children when they are newborns or infants. The rationale behind such a product goes like this: Because life insurance is more expensive the older the insured is, it makes sense to lock in a low rate at the earliest possible age. Moreover, because whole life policies build cash value in addition to providing death benefits, plans such as Gerber's protect you financially from a worst-case scenario, as well as provide a vehicle to save for college and other future expenses. Developing a medical condition down the road could preclude your child from obtaining life insurance. Purchasing the Gerber Grow-Up Plan ensures he has coverage regardless of what happens during the ensuing years.
Though the Gerber Grow-Up Plan offers several tangible benefits, it is not the panacea the company makes it out to be. The biggest argument against purchasing life insurance on children is that it just is not necessary. Excepting child stars, children do not earn incomes, nor do they support families. Losing a child is emotionally devastating, but not financially devastating. While your kids are probably going to earn income and support families when they grow up, the maximum death benefit under the Gerber Plan is woefully insufficient for an adult with dependent children. While the plan's cash value aspect may look enticing for college savings, most respected financial advisors pan whole life insurance as a long-term investment vehicle, pointing out that, historically, the returns are anemic compared to mutual funds and other investments.
Children Do Not Need Life Insurance
The primary purpose of life insurance is to protect the insured's family and dependents from financial calamity if he dies prematurely and his income is cut off. For example, a father and a mother earn $50,000 per year each and have two young children, both of whom they hope to send to college. The father dies in a car accident during a severe thunderstorm. His wife and children are devastated emotionally, and the family income is cut in half. Now the mother has to pay for the house, car, food, clothing and other necessities on her own, and she must also find a way to continue saving for her children's education.
The father and the mother in the above scenario need life insurance. The family depends on the parents' income, the loss of which creates a severe financial hardship. Children are different. While they contribute many things to their families, money is almost never one of them. Rare exceptions exist, but for the most part, few families rely on a child's income to get by. It makes little sense to pay to insure yourself against a doomsday scenario that does not even exist.
There is one financial cost incurred by parents who lose a child: funeral and burial expenses. If you have life insurance on yourself, you can almost always attach a small child rider to your own plan for a much lower rate than what the Gerber plan is likely to cost.
It has been established that children do not need life insurance coverage while they are still young. However, they will probably need it when they grow up. It is a strong possibility that at some point, your kids are going to have families of their own that will depend on them financially. The Gerber Grow-Up Plan allows them to secure the coverage they need later at an early age while it is still inexpensive. The only problem with this line of thinking is the Gerber plan does not actually enable your children to obtain anywhere near the level of coverage that will be necessary when they have dependents of their own.
The Gerber Grow-Up Plan has a maximum death benefit of $100,000. That is way too much life insurance for a child, but it is nowhere near enough for an adult who has his own dependent children. Consider the father in the example above who makes $50,000 per year and dies while his children are young. A death benefit of $100,000 would replace his income for only two years; after that, the mother is once again on her own. This man needs a death benefit of closer to $1 million, which the Gerber plan does not offer.
Cash Value Life Insurance: A Bad Investment
Whole life insurance provides more than a death benefit. Each month when you pay the premium, a portion of that money goes into a fund, and that fund grows with interest. Down the road, if you decide you no longer need the death benefit, you can instead elect to receive the current cash value of your policy. This is a big selling point of the Gerber Grow-Up Plan: It doubles as a college savings vehicle, with its cash value serving as a de facto college fund.
This line of thinking also presents a problem. Historically, cash value life insurance grows at an anemic rate. Your child's college fund stands to become much more robust if you invest it in mutual funds. Granted, mutual funds do not provide life insurance for your child, if for whatever reason you think you actually need this coverage. However, attaching a rider for your child to your own life insurance policy would solve this problem at a much lower rate than purchasing the Gerber plan.
In fact, the combination of a child rider for life insurance and a mutual fund for college savings presents the most auspicious alternative to the Gerber Grow-Up Plan. If the worst happens and you lose a child, the rider protects you from incurring funeral and burial costs at a lower premium than the Gerber plan. For college savings, mutual funds offer a much stronger track record than cash value life insurance.