New parents always want to do the best they can for their children. Does that mean buying Gerber Life Insurance for them?
Gerber Life Insurance is one of the most "marketed" life insurance products out there - with the iconic Gerber baby logo.
We explain what the insurance is, and why you may (or may not) want to buy it for your little ones.
See how it compares to the best term life insurance companies.
Quick Summary
Gerber Life offers whole life insurance policies
The Grow-Up Plan is marketed towards new parents
May not make sense for most parents
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What Is Gerber Life Insurance for Children?
Why Have Life Insurance for Children?
When It Doesn’t Make Sense to Buy Life Insurance for Children
How Much Does It Cost?
Does It Make Sense to Buy Gerber Life Insurance for Your Child?
What Is Gerber Life Insurance for Children?
Gerber, yes the baby food company, is also in the financial services business. Specifically, it offers a form of whole life insurance for children called the Grow-Up® Plan. If you’re a new parent, you’ve probably seen at least a few ads for this insurance.
The Grow-Up® Plan is a typical whole life insurance policy which means it has the following features:
You pay equal monthly payments for as long as you hold the life insurance policy.
If the covered person (your child) dies, the insurance company will pay out the policy value (with Gerber the policy can be $5,000 to $50,000).
The policy builds up a “cash value” over time. You can borrow against the cash value, use the interest from the cash value to pay premiums, or give up the policy in exchange for the cash value. We will discuss more about the cash value concept later on.
The plan also has a little twist. When the covered person turns 18, the policy amount doubles (from $10,000 to $20,000, for example). This makes it a little more valuable for the child. Also, when the child turns 21, they automatically own the policy.
Why Have Life Insurance for Children?
The Gerber Life Insurance policy is first and foremost a life insurance policy. The main reason to buy life insurance is to cover the loss of income and the increase in expenses that are incurred when a person dies. In general, parents need life insurance for themselves whether they are part of the formal workforce or they work at home (stay-at-home parents).
By contrast, parents don’t really need life insurance for their children. Children don’t earn income, so parents don’t need to replace their income should the child die.
However, I think there are valid reasons to consider buying a whole life insurance policy for your child. Here are the reasons I would consider it:
Your child is facing a disability or severe diagnosis that would make it difficult to buy life insurance later in life.
You can get a cheap life insurance policy on your children through work (I pay about $5 per month for $10,000 in coverage for my three kids).
You don’t have $3,000 to $5,000 to cover funeral costs.
When It Doesn’t Make Sense to Buy Life Insurance for Children
A lot of the Gerber life insurance marketing surrounds the cash value part of the policy. The advertising implies that your child may be able to use the cash value to pay for college or major expenses (like a wedding) years down the line.
That implied advertising is true. Your child can borrow against the cash value that’s built up in a life insurance policy. The problem is that cash value in a life insurance policy builds up very slowly over time. After paying into the plan for 17 or 18 years, the $50,000 policy may have just $3,000 to $4,000 of cash value built up into it when your child hits college age.
If you want to give your child access to money between the ages of 17 and 25, a life insurance plan is rarely the way to do it. The cash value builds too slowly to be worthwhile in the life of your child.
How Much Does It Cost?
I requested quotes for my one-year-old daughter, and I found that prices on the policy ranged from $3.40 for a $5,000 policy to $32.40 per month for a $50,000 policy. The actual costs will depend on the age of your child, where you live, and the child’s gender.
I’ve known a few people who had parents or grandparents pay for the Gerber Life Insurance policy for the first 20+ years of their life. Now that these people are in their late 30s, the policies are considered self-sustaining. That means that the policyholders can pay their premiums using the interest earned from the cash value in the policy.
There is no guarantee when a Gerber Life Insurance policy will become self-sustaining. In the current, low interest rate environment, it could take several decades (because life insurance companies invest in low-risk options such as bonds). However, if interest rates rise, the policy could become self-sustaining by the time your child reaches early adulthood.
Does It Make Sense to Buy Gerber Life Insurance for Your Child?
I suspect that most parents don’t need to buy a whole life insurance product for their child. From a financial planning perspective, I don’t see a big need for the Gerber Life Insurance product. The only reason to consider it is if your child has a serious disease or disability which may disqualify them from buying life insurance on their own as an adult.
Although I don’t love the Gerber Life Insurance policy in most cases, I think child life insurance could make sense in the right situation. I’ve always had coverage on my children through a workplace plan. It’s a very inexpensive benefit (when purchased through work), and it gives me peace of mind to know that I could step back from various types of work if one of my children died.
The post Gerber Life Insurance: Should You Consider This for Your Child? appeared first on The College Investor.