Tuesday, March 25, 2014

Life Insurance for Children? (Gerber Life Insurance)

Should you insure your baby?  What on earth for?

I received a brochure in the mail for Gerber Baby Insurance.  I was about to toss it away, but figured, "Heck, this is prime blog meat here."

And besides, there's nothing in the news today except a lame article (also on NPR) that notes that "Payday loans are a bad deal!"  (Oh really?  I never would have guessed).  That ground has been covered.

So,what about Baby Life Insurance?

At first glance, this seems like a good deal.   You pay $3.18 a month for $5,000 in coverage.  At age 18 (described as "during age 18") the coverage doubles to $10,000.   $3.18 a month works out to $38.16 a year, and for the average life expectancy in America of about 77 years (average between male/female) that comes out to $2,938.32 in lifetime premiums - with a cash payout for your child's heirs of $10,000 (which in 77 years will buy what, a cup of coffee?).

However, when you "do the math" on this, well, another picture emerges.   $38.16 invested yearly for 77 years at a paltry 5% interest, yields $33,507.29 according to the Moneychimp compound interest calculator.   If you can make 7.5% in stocks, over time, heck, you'd have $142,806.21 - for your kid to spend on himself, not his ungrateful heirs.
So you see, the folks at Gerber are making out pretty well.  They invest these premiums at market rates and pay back, on average, 2.74%.   Of course, maybe you will win the Sudden Infant Death Syndrome lottery and "Cash Out" and win big!   Or maybe not.

Yes, the Gerber policy builds "cash value" over time - but what that value is, is anyone's guess.   The site is silent as to whether there is a guaranteed cash value (as with my Northwestern and State Farm policies).  However, based on my experience with those policies, I doubt the cash value would exceed the face value of the policy - at least for a very long time.

In fact, it is hard to find any information on these polices online.   As you might expect, there are a lot of "sites" out there like Wikianswers or Yahoo Answers that are basically the Gerber brochure barfed-up intact, along with some cheerleading nonsense about what a great idea this is.

This article from Marketwatch labels it the "stupid investment of the week" and that probably nails it pretty well:
"Buying $25,000 in coverage for a one-year-old would cost less than 50 cents per day, which sounds pretty good until the parent recognizes that the $175 per year would pay for a $100,000 term life policy that would protect the family until the child reaches age 21."
And that is really the point of insurance - to insure things worth insuring - like YOUR income, which is really what protects your child.   If your kid dies young, well, he doesn't need insurance.  And as he gets older, well, that money spent on the insurance might come in handy for other things.

And as the author notes, a lot of people probably let these policies lapse, particularly kids when they turn 21, and figure they have better things to do with their money.  Or perhaps Grandma dies, and the policy payments are no longer made.

To me, the telling part of this pitch isn't in the math, but in the way it is sold.   First, the brochure comes in the junk mail - with the coupons for pizza and stuff.  It is SPAM, pure and simple.   Second, the wording of the brochure is a little oblique.   The pitch is the same as the one for burial insurance - you get thousands of dollars of coverage for pennies a day!   It plays to the plebe mentality of cashing out big for small money down - the gambling mentality.

Life insurance, as I have noted before, is not a very good investment.  In fact, it is not really an investment at all.    If I had the money I had spent on premiums on my Northwestern Mutual Whole Life Policy over the last 20 years, it easily would exceed twice the existing cash value it is worth today.  Of course, as this point, I might as well keep the policies, as they increase in value by nearly two dollars for every dollar invested at this point.   Still, overall, in terms of an "investment" I would have been better off feeding my 401(k) with the dough.

Insurance is just what it purports to be - a bet placed that you will die.  And when you buy baby insurance, you are betting on your baby dying.   It is pretty morbid.

There are, of course, worse ways you could go about wasting a couple of thousand dollars, such as buying lottery tickets or just plain gambling.   I suppose a life insurance policy like this is one way of teaching kids about investing, at an early age - and illustrating how money invested very young can create huge yields later in life.   But then again, there are other ways of investing and saving that would accomplish this as well, and as noted, life insurance is not really an investment.

And even if you went this route, it would pay to call multiple agents at multiple companies.  There are other companies out there besides Gerber, that offer whole life policies, such as Northwestern.   Rates can vary - as well as policy terms.  It pays to shop around, as insurance is marked-up heavily, and usually the people advertising on television or by junk mail (such as the burial insurance people) have the highest rates.

Are there any advantages to baby insurance?   Well, you can borrow against the cash value, of course, but at a whopping 8% interest, which is kind of ridiculous in this day and age.   And for a $10,000 policy, the cash value is pretty slim for the first couple of decades of the policy.   This ain't much of a catch.

There is another aspect, as discussed in the Marketwatch article and touted by Northwestern as well:
"About the only way the Gerber plan is likely to be a real benefit is if the child somehow becomes uninsurable, developing a condition that makes it hard to get coverage as an adult. The Gerber plan guarantees coverage, but that protection is severely limited and the additional coverage beyond the small minimum comes at “standard rates.” That’s likely to be pricey because insurers typically price bulk coverage as if customers have one foot in the grave."
 So, if your child develops some horrific disease later on, they may be guaranteed coverage for "up to ten times" the initial coverage, but at rates that may be far higher.

But you know, that sort of is a long-shot deal.  And if your child develops some sort of debilitating illness, then chances are, they aren't going to be interested in long-term investments like this.

So overall, I would have to put this down as not a very good deal.

* * *

Another thought occurs to me is that if you really want to buy $10,000 of life insurance for your child or grandchild, a better deal would be to purchase a "paid up" whole life policy, with a one-time premium.  This way, the policy is always in force, even after you die, or if your child/grandchild forgets to pay the premium after you die.   Again, I am not suggesting that you buy one of these policies, but it sounds like a better deal to me to give a "paid up" policy than one that is only paid for the first few years.