The Only College Plan That's Also Life Insurance Is A Bad Investment
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A while back, I saw a TV commercial for what appeared to be life insurance from a baby-food company: Gerber.
After a little Googling, I realized that the ad was for the Gerber Grow-Up Plan, a whole life insurance policy for children offered by Gerber Life. In the course of looking into it, I stumbled across the Gerber College Savings Plan, another life insurance policy meant to store money for a child's education.
I had already found that that life insurance isn't needed by most healthy children, but what about to save for college? Is life insurance really the best way to do that?
Simply put: no. Before detailing why, let me explain exactly what the Gerber plan is.
What is the Gerber College Savings Plan?
I called the official information line to get the rundown, and this is what they told me: The three-year-old Gerber College Savings Plan provides what's called "endowment" life insurance, which is a type of term life insurance that provides coverage for a limited time. When you sign up for the policy, you decide how much value it will store and how long you'll wait to collect it.
You pay a monthly premium determined by your time frame and chosen value, and that money is invested in what the representative called "safe investments." In fact, the way she put it was that "it doesn't matter what the economy does," because you'll still get your payout. At the end of that period, you get a lump sum, which you will need to pay taxes on. (They didn't tell me the taxes part — that's from Chuck Jaffe's scathing takedown of the policy on MarketWatch, where he also calculated the return on the "safe investments" and determined it was "virtually nothing.")
While you can cash in the policy before the end of the agreed-upon term, you only get the cash value up to that point — not the full amount you had planned. If the worst happens and the policy holder passes away, the family gets the payout. In that way, it's both college savings and life insurance: If you use that money to pay for college, it's college savings. If you use that money to provide a death benefit for your family, it's life insurance.
The website claims that it's the "only college plan that's also adult life insurance," and it's worth noting that colleges don't include life insurance policies in their student aid assessments — so storing that money in a life insurance policy may be able to help some families with financial aid.
Why isn't it the most efficient way to pay for college?
The Gerber College Savings Plan states clearly on its website that it's adult life insurance with a guaranteed payout that can be used to pay for college (or not), but that doesn't mean it's the best use of your college savings dollar.
"Despite the name, the Gerber College Savings Plan doesn't offer state tax-deductible contributions or the ability to withdraw and spend funds on college expenses tax-free, both of which the 529 savings plan offers, and therefore isn't a college plan at all," Alan Moore, founder and certified financial planner at Serenity Financial Consulting, explained to me when I asked for his professional opinion. "This plan is more of a forced savings account, as the actual payouts offer very little gains."
The 529 savings plans Moore mentioned are remarkably flexible, state-sponsored savings accounts with tax benefits. They're generally the default savings option recommended by financial planners, and according to Moore, they're a better option than life insurance.
Plus, the guarantee of the Gerber plan's cash value is contingent upon monthly payment of premiums, like any other insurance plan. In contrast, 529s do not regulate how much or how often you must contribute, beyond large-scale contribution limits, and they never expire. If you open a 529 savings plan and contribute to it once, the account's beneficiary gets that money for college, no matter what.
"This plan might make sense for someone who needs a forced savings account and something they can set and never think about," explains Moore. "However, most people can easily do better on their own, and a lot better by hiring a financial advisor to help."
Libby Kane, CFEI Executive Editor, Personal Finance Insider Libby Kane is a personal finance expert who has reported and edited stories about money for more than 10 years. She holds the Certified Financial Education Instructor (CFEI) certification issued by the National Financial Educators Council.Experience She has written and edited articles on everything from investing tips to model budgets and has interviewed dozens of authors, financial planners, and early retirees to share their advice, experiences, and insights with a global audience. Before joining Business Insider in 2014, she was an associate editor at LearnVest, a personal finance site to help women learn about money. Her work has appeared on sites such as MSN, AOL, Forbes, Slate, and The Street.Her team at Business Insider has tackled projects including:• Women of Means, a series about women taking control of their finances• Inside the Racial Wealth Gap, an exploration of the causes, effects, and potential solutions of the racial wealth gap in the US (finalist, Drum Award, "Editorial Campaign of the Year," 2021)• Strings Attached, a series of essays from people who have left insulated communities and how that journey affected their relationship with money• Master Your Money, a year-long guide for millennials on how to take control of their finances (first runner up, Drum Award, "Best Use of Social Media," 2022)• The Road to Home, a comprehensive guide to buying your first house (silver award winner, National Association of Real Estate Editors, "Best Multi-Platform Package or Series – Real Estate," 2022)Libby believes in one universal truth about money: Advice is never for everyone. The best strategies, tools, and products depend on your preferences, financial situation, history with money, and goals.ExpertiseHer expertise includes:• Behavioral finance• Early retirement• Budgeting• Saving moneyEducationLibby holds a bachelor's degree from Wellesley College.Outside of personal finance, Libby enjoys reading, baking, and walking her dog. Read more Read lessncG1vNJzZmivp6x7o8HSoqWeq6Oeu7S1w56pZ5ufonyosdGbnKtlk6S5rbHGnmSsmaaeu6i%2FjKmjmqZdZ31ygIxv