A surprising number of people ask me about buying life insurance for their children. You know, the kind sold as an investment—you pay in for 18 to 25 years, and your pride and joy will have a tidy little nest egg she can use to pay for college or her first home. I spoke to a couple of financial experts on the subject, and I can now reliably tell you: Step away from the whole-life policy.
The high points:
What are you talking about?
A whole-life policy offers a guaranteed rate of return for the money you put into it. So, for instance, you’d put $100 a month toward your child’s whole-life insurance policy, and at the end of 18 years, you’d have the money you paid in, plus some earnings. (You put in $10,000, say, and you get $12,000 back.) Parents are attracted to it because it seems like a safe investment.
What’s the problem?
The earnings aren’t great. I plugged some numbers into Gerber Life’s Whole Life policy for children, and for slightly less than $100 a month, it guaranteed me $25,000 in 18 years. That seems nice until you do that math and realize you’re earning less than 2% every year.
That’s more than the stock market made last year, no?
That’s true, but you’ll be investing for far more than one year. “Last year was a horrible year,” says Victoria Collins, a financial planner in Irvine, Ca. “There was really no growth. But over 18 years, I’d want more potential for return than a guaranteed two percent.”
So what’s the answer?
Keep insurance and investing separate. “When you try to mix the two, you’re paying more for the investment because you have the insurance wrapper around it,” Collins says. Take the money you’d put toward an insurance policy and sock it into a 529 plan instead, or open an account at Vanguard and stick to the 500 Index Fund, which offers low fees.
What’s your investing question?