I received a detailed response to one of my earlier posts, sharing my and many experts' negative opinion of whole life insurance purchased on the lives of children. I've asked the reader (James Garfinkel) if I could repost his response in its entirety, since it wouldn't fit in the comments section.
Here's the first portion:
"Juvenile Life Insurance as a college savings tool is entirely different to the child insurance products offered by Gerber Life (advertised heavily on television recently). The Gerber Life College plan is insurance on an adult. The Gerber Life Grow Up plan is a form of whole life insurance (on a child) structured to provide insurance for burial purposes and to lock-in guaranteed insurability, not for college savings purposes. For the remainder of this comment Juvenile Life Insurance will refer to the type offered by New Amsterdam Life, not the Gerber Life Grow Up plan.
As Ken points out in his post "investments you should avoid when saving for college", the drag (administration, sales, and insurance costs) associated with life insurance is greater than the drag of a 529 plan, but this drag is less for Juvenile Life Insurance products than with adult insurance due to the structuring of the product to maximize cash value growth, which conversely minimizes sales commission and insurance costs.
Juvenile life insurance provides growth guarantees, unavailable with a 529 plan. The 38.5% decline in the S&P 500® index in 2008 dealt a devastating blow to a lifetime of carefully managed college savings. Indexed juvenile life, a popular form of Juvenile Life Insurance, is permanent universal life insurance that has cash value increases linked to the performance of an equity index (e.g., S&P 500®) up to a certain percentage (a "cap") with downside protection (a "floor"). Indexed Juvenile Life has a growth floor of 0%-2% and a growth cap of 13%-15%, which confines growth to within a set band. The cap and floor reduces volatility and allows indexed juvenile life insurance to create more wealth over a set time period, inclusive of costs."
More coming soon...
The idea of starting my child’s lifetime and college savings when he is just a baby makes a lot of sense. There does not seem to be very many savings options that offer guarantees and have the potential to outperform the stock market.
I joined their program in 1987. Still have not been able to contact them!