Is the Gerber Life College Plan a good investment?

Parents constantly worry about their children, it’s their job to do so anyway. Where are they on the growth chart? Will they get along with other kids? Will they do well in school? Am I, as a parent, doing everything I can to protect my child now and in the future? Is The Gerber Life College Plan A Good Investment?

The Gerber Life College Plan by Gerber Life Insurance promises guaranteed growth and the flexibility to use the money to pay for college or other expenses. But, the investment earnings are taxable and do not keep pace with college tuition inflation. The Gerber Life College Plan also offers inferior performance as compared with the return on investment available on FDIC-insured Certificates of Deposit and 529 college savings plans.

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Gerber Baby College Plan

What Is the Gerber Life College Plan?

The Gerber Life College Plan is an individual endowment policy that provides adult life insurance and matures in 10 to 20 years. The money grows over time, without risk. Since you’ll know from the start the amount that your child will receive at the end of the term, planning for college will be easier.

The payout money can be used for funding higher education or for anything else, such as starting a business, or technical training, or the down payment for buying a home. In the unthinkable event that you pass away before the policy matures, your child as beneficiary will receive the full payout amount

However, unlike a whole life policy, coverage with an endowment policy lasts only for a fixed number of years. If you pass away during the period of coverage, your beneficiaries would receive the entire face value of the policy. If, however, you live longer than the period of coverage, you receive the policy’s face value which, at that point, would equal its cash value.

Gerber College Plans come with face values between $10,000 to $150,000, and are priced according to your health, since you’re the one who’s insured for the length of coverage.

The Gerber Life Grow-Up Plan is a whole life insurance policy you can purchase for your children from the time they are 14 days to 14 years old. You can buy a wide range of coverage for your child, from $5,000 to $50,000. This policy provides financial protection, builds cash value and can guarantee life insurance coverage for a lifetime as long as premium payments are made.

Gerber Life College Plan yields low earnings

The My Child’s College Plan tool on the Gerber Life Insurance web site calculates the total savings for various monthly payment amounts and plan terms in years. For example, this snapshot shows that payments of $57.02 per month for 13 years yield a total of $10,000 in savings or plan payout.

Is The Gerber Life College Plan A Good Investment

That’s the equivalent of an annualized return on investment of 1.76%.

Other examples yield higher interest rates, which seem to center around about 2.6% to 2.7% annual ROI, though a few apparent edge cases yield a lower annual ROI.

$42.50 per month for 16 years yields $10,000, the equivalent of a 2.46% annual ROI
$51.72 per month for 14 years yields $10,000, the equivalent of a 1.96% annual ROI
$72.92 per month for 10 years yields $10,000, the equivalent of a 2.60% annual ROI
$435.05 per month for 17 years yields $113,000, the equivalent of a 2.73% annual ROI

Note that these performance figures are before taxes. Families must pay taxes annually on the earnings from a Gerber Life College Plan, unlike a 529 college savings plan.

If a family cancels the Gerber Life College Plan, the refund value may be less than or equal to just the contributions made by the family. The plan payout is guaranteed only when the policy reaches maturity, if all plan premiums have been paid.

Gerber Life College Plan falls short of tuition inflation

The performance of the Gerber Life College Plan does not keep pace with college tuition inflation. Current tuition inflation is 3.6 percent at private 4-year colleges and 3.1 percent at in-state public 4-year colleges, according to the College Board’s Trends in College Pricing 2017.

Longer-term tuition inflation is even higher. Using a 17-year moving average, tuition inflation averaged 4.6 percent at private 4-year colleges and 6.3 percent at in-state public 4-year colleges.

Gerber Life College Plan performance similar to short-term bank CDs

The performance of the Gerber Life College Plan is similar to the interest rates on current 1-year bank CDs, as reported by Bankrate.com.

The Gerber Life College Plan does lock in the earnings over a 10 to 20 year term. But, in a rising interest rate environment, one would expect a higher return on investment for a long-term investment. For example, the best interest rates on 5-year CDs, as reported by Bankrate.com, provide a higher return on investment than the Gerber Life College Plan.

Bank CDs also provide the benefit of FDIC insurance, which the Gerber Life College Plan does not.

529 College Savings Plans outperform Gerber Life College Plan

The performance of the Gerber Life College Plan is about half the current average return on investment of 529 college savings plans, as reported in Savingforcollege.com’s quarterly performance rankings. A 529 plan currently yields more than double the earnings of the Gerber Life College Plan.

529 plans also offer several tax advantages that aren’t available to the Gerber Life College Plan. The earnings in a 529 plan grow on a tax-deferred basis and are entirely tax-free when used to pay for qualified higher education expenses. More than two-thirds of states offer income tax deductions or credits for contributions to their 529 plan.

Gerber Life College Plan hurts financial aid eligibility

The Gerber Life College Plan appears to be a form of life insurance, which is not reported as an asset on the Free Application for Federal Student Aid (FAFSA). However, the full plan payout amount may need to be reported as income on the FAFSA, reducing eligibility for need-based financial aid by as much as half of the distribution amount.

Gerber College Plan Vs 529 – Which Plan Is Right For You? Lets Compare

Gerber’s endowment life insurance policy is called a College Plan, on the assumption that you’ll use the policy’s proceeds to pay for your child’s education. As an endowment life insurance policy, however, Gerber’s College Plan has several key differences compared with other college savings alternatives, such as 529 plans. Here’s how it’s different:

The premiums are not state tax-deductible.
You cannot choose how your cash value is invested; rather, the policy’s value at maturity is guaranteed.
Endowment life insurance isn’t considered by colleges in financial aid calculations.
You’re free to use the proceeds however you choose, not just for educational expenses.

While the College Plan provides life insurance coverage, it doesn’t have all the benefits of other life insurance policies. The biggest distinction is that your cash value investment gains are not tax free, which reduces the policy’s overall benefits. Considering the policy’s returns are fairly low, simply buying term coverage and investing in an alternative college savings account would probably be more lucrative.

To illustrate, say you’re a 35-year old father who just had a child and wanted enough money to pay your kid’s college costs 20 years from now. Gerber’s College Plan would charge $436.02 per month for a guaranteed coverage amount of $131,000. Over a period of 20 years, you would have paid $104,645 in premiums. Subtracting those premiums paid from the policy’s coverage amount yields a gain of only $26,355 before taxes. That figure represents an average rate of return over that period of only 2.1%, and even that yield would be further reduced after taxes are included.

Gerber’s College Plan might be a good option only if you’re concerned about your ability to consistently contribute to a college savings plan or are extremely risk-averse. Returns are guaranteed and, in the event you have an emergency and need access to money, you can either access the policy’s cash value through a loan or by surrendering the policy.

Policy loans come with an 8% interest rate, but you’re free to keep the money as long as is needed. Surrenders come with large fees initially, and typically no cash value is accumulated for the first three years of coverage. That said, once you pass the policy’s midway point, you are able to recoup the sum of all premiums paid.

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Which Plan Is Right For You?

Money put into a 529 Plan can be used only for qualifying educational expenses, which include tuition, fees, books, and room and board at accredited schools. The Gerber Life College Plan provides flexibility by letting the student use the payout funds for college or technical school or anything else, without limitation.

In terms of risk, the rate of return on 529 Plans is tied to the stock market. This offers the possibility of greater returns than the Gerber Life College Plan, but also means greater risk if the stock market goes down. The Gerber Life College Plan offers guaranteed growth that isn’t impacted by the stock market. You know exactly how much money you’ll have at maturity, assuming that all premiums are paid.

Think about what you’re most comfortable with. Are you okay with taking on a little risk, or do you want something stable? Would you like to limit funds to college use only? Your feed back is important to us.

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