Gerber Sells A College-Savings Plan, But You Probably Shouldn't Buy It
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."