Gary: Finally, a topic I can talk about!
Wow, it’s been a while, Gary.
Gary: You’ve been off-topic for a while with all this tax-related advice, education on saving strategies, and so on. I’ve been trying to talk product for a while!
Thrilling.
When my youngest daughter was born last year, we received the opportunity to purchase $5,000 of whole life insurance for less than a dollar a week!
You: Why are you shouting?
I’m not shouting, I’m just trying to relay the enthusiasm presented in the cover letter.
You: Oh.
Gary: It’s a great idea – buying life insurance for a kid!
You: It is?
No, it’s not.
Gary: Think about it. It’s as cheap as it will ever be (the kid was just born, his/her life expectancy is forever), there’s usually no medical check-up required, and when you buy the policy, your child has protection for life.
You: How so?
Gary: There won’t be any future medical evaluations to retain the policy. So if your child becomes seriously ill and would otherwise not be insurable, he/she would still have coverage through this policy. Such peace of mind is worth a lot.
You: Is that so? Is all of this true, Michael?
Yes.
You: So I’ll guess I’ll sign Junior up.
No.
You: No?
Gary: No?
No.
You: Why not?
Because, as usual, Gary is only telling you half of the story.
Gary: Hey, I’m right here.
You: What’s the other half?
Think about the true purpose of life insurance.
You: I’m not sure – to protect your loved ones, right?
Exactly.
You: Cool. Got that one right.
Gary: It’s also an investment.
It can be an investment, Gary. But the primary purpose of any life insurance purchase should be to protect your loved ones. Other features are gravy. Some additional life insurance benefits could have value in certain situations – but you must start your analysis with an understanding for how the purchase will increase our ability to protect your loved ones.
You: I’m with you. But I love my child.
Of course you do. I love my little girls.
You: Do you have life insurance?
I sure do.
You: Then why are you telling me not to buy some for Junior?!
Because my life insurance is on my life, not my children’s. (We have life insurance on my wife’s life too.) Emotions aside, if something were to happen to me or my wife, we would be financially devastated (absent life insurance) since an income would be lost overnight.
You: Okay, I see the importance of the parents having life insurance.
But if my child were to die – the worst thought imaginable from an emotional standpoint – it is, financially-speaking, utterly irrelevant.
You: Why?
Because neither of my children have an income. In fact, they cost me money (and a lot, especially given their appetites, but I digress.) As a result, there would be little financial impact from their early passing.
You: But what about if they get sick and would be unable to get insurance on their own?
Gary: Yeah, what about that?
First of all, the odds of that happening are unbelievably slim – realistically, when they have children of their own, they’ll need life insurance and will buy it then. Second, even if they do find that they need life insurance and are not insurable at that time, the amount of insurance they can get via this policy is likely to be highly insufficient.
Gary: What about the cost being so low? This is just a few bucks a week we’re talking about and some policies even provide for your money back in twenty years! Can’t beat that.
You: That does seem like a pretty low risk to take.
Both of those facts help to lower the risk of this purchase decision. But doesn’t the offer to get your money back in twenty years seem too good to be true?
Gary: No.
You: A little.
Think about why the insurance company can do this – why it is that they can pay all that money back to you in twenty years.
You: I don’t why.
Gary: Because we can.
Exactly.
You: Really?
Gary: Really?
Yes. The life insurance companies can provide this “money-back guarantee” after 20 years because they’ll stilll make money.
You: How?
Gary: I’ve got to get a job at corporate.
The insurance company can keep all the premiums paid over the twenty years, invest it, earn a profit and then just return to you the amount of money you originally paid.
You: With interest?
Of course not. The true cost of insuring someone who hasn’t yet reached adulthood is microscopic, so the insurance companies can help close this deal (at an emotional time for new parents) by apparently taking the risk away in making this decision.
You: But I still want to help my child.
Gary: See, Michael!
I see, Gary.
Congrats on being motivated to give your child a great financial head start. To do so, I recommend you strongly consider starting a 529 plan with the same money you otherwise would have spent money on life insurance you don’t need. That’s a bigger help – and the money can grow between now and when your child goes to school.
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Something tells me I’ll be hearing from you – thoughts?
Tags: gerber life insurance, insurance for children, life insurance
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Hey Michael – I recently had someone argue that whole life was a good choice for college planning – her argument was that it is not looked at as an asset in the financial needs analysis for scholarships, grants, etc. I haven’t researched this – what are your thoughts?
@Alison: I’d answer the question like this: If, when you apply for financial aid you had a choice of showing $1,000 of a non-counted asset (life insurance cash-value) and a $1,000 of a counted asset (regular taxable brokerage account), you’d of course choose the non-counted asset.
But there’s more to it.
There’s significantly more expenses to the whole life insurance policy during the first 15 years of life since the insurance company promises a flat premium rate for life. The premiums greatly exceeds the cost of the insurance, but you do have to pay it (that’s where the cash value comes from). Still, you’re going to have some mortality expenses you’d have to pay, lowering the amount you have by age 18.
Second, there will be other administrative expenses to pay.
Finally, how are you going to actually get the money to pay for college? If you’re wealthy enough to pay it from money in “some other account,” this exercise is irrelevant – you’re not getting financial aid anyway. But if you need the cash, to take it out of the whole life policy means a loan (and interest you’d pay on it) or an outright taxable withdrawal (at ordinary, not capital gains rates.)
While this is (believe it or not) an overly simplified explanation, the fact remains that there are much better ways to save for college than a whole life insurance policy for a kid, starting with a 529 plan.
But, I have been paying my kid life insurance from “Gerber” almost 10 yrs already. If I quit now, I will lose all the money that I contributed the money-back warranty after 20 yrs. Pls give me some advices. Thanks.
The money you spent is gone no matter your decisions going forward. If you think the money you’re “warrantied” to return in 10 years is worth turning over the sums you’ll need to do so during the next 10 years, it’s your call. Just remember: if it sounds too good to be true, it usually is.
My interest in this product is that I understood it would provide a tax-free, chunk-of-change for my daughter in 25 years. I do not have any material things for her to inherit: no house, no assets, no savings, nothing. I cannot pay for her college. My understanding: that this is similar to, though somewhat safer than, i> “tucking-it-under-the-mattress” for 25 years.
@CD You’d be infinitely better off taking the same amount of money and putting it into a 529 plan for her benefit for college. If she’s my daughter, I’d rather her have something, even if small, for college, than something even smaller for something else. The life insurance (which you’d be paying for) isn’t helping anybody in this situation.