Many of you may have heard of the Gerber Grow-Up plan. Essentially this is pitched as a life insurance and savings product by a baby food company – that right there should be enough to tell you that this isn’t a good idea. Typically aimed at the parents of newborns, this product gives you the option of purchasing life insurance on your child ranging from $5,000 to $50,000 worth of coverage. The insurance is a whole-life policy which means that it also has a savings, or cash value component, that grows right along with your child. And, at age 18, your child has the option to double their coverage guaranteed. On the surface, this sounds like a pretty good deal, right? Let’s dig in further.
For starters, life insurance is intended to replace the lost income of someone who passes away to protect those who depend on that person’s income. Since a child does not produce any income, it is ridiculous to purchase life insurance for them. Next, the premiums on these policies are outrageous. $5,000 of coverage costs $2.92 per month or $35 per year; at the maximum face value of $50,000, the premium is $336 per year. As an adult male, age 45, I pay $160 per year for $200,000 worth of coverage. Third, one of the secrets that insurance companies don’t tell you is that any cash value built up inside a life insurance policy disappears when the insured passes away. You can’t get both the face value of the insurance and the cash value of the insurance. If you cash out the policy, then the policy expires. If you borrow from the cash value, then you have to pay it back to the policy and any amount that remains unpaid when the insured passes away is deducted from the face value of the policy. If the insured dies, only the face value of the policy is paid out and the insurance company keeps the cash value.
Next, let’s look at the savings component. All whole life insurance policies tout the savings as a benefit. On Gerber’s website itself, it tells you that in 25 years that the cash value will be at least equal to what you paid in premiums. Let’s say you purchase a $50,000 policy for your newborn at a rate of $336 per year. They are telling you that at age 25 the policy will have $8,400 in cash value. If you stick the same $336 in the bank at 3% interest you’ll have approximately $12,500 in 25 years. For long-term investing, you can do much better in the stock market, which has averaged 11% per year since the Great Depression, by using an index mutual fund. If you can average 11%, then that amounts to $48,000 after 25 years.
Another thing that Gerber (and others that pitch buying life insurance for children) will tell you is that this guarantees that your child will have life insurance in the event they have some illness that makes them uninsurable as an adult. While this is true, the risk of that is very low and there are other options (like insurance through an employer) that your child will have if something like that happens. The last argument that the Gerber folks will make is that this provides you with money for your child’s final expenses should something happen to them. That is the only part of the plan that makes any sense. A couple of observations with this, though. One, if you’re planning well financially, you’ll have more than enough in emergency savings to cover something like this. Secondly, child riders are available on many insurance policies (typically offered by employers as a benefit to their associates) that can be had for a couple of dollars per month. Third, it’s my opinion that this is a fear-based tactic and you should avoid anyone who uses such approaches to get you to purchase anything.
In short, the Gerber Grow-Up plan is a waste of money. If you have one of these policies for your child, my recommendation is to cancel it and get any cash value you can from it and put the same amount of money into the bank each month. If you own one of these as an adult, replace the insurance component with a good term insurance policy and get your cash value out of the Gerber plan. Don’t be drawn in by a cute baby to a ridiculous product, and Gerber, stick with making baby food.