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  • Teaching Your Child to Delay Gratification

    Life is so hectic that delayed gratification is not as high on my list of priorities as I wish it could be. When I tell Alex that he needs to wait, I do it out of necessity rather than as a teaching tool. However, I do think that delayed gratification is extremely important and I really like the experiment mentioned in this letter at All Financial Matters from a mother to her daughter about saving for retirement:

    When you were a little girl I did an experiment with you. You didn’t know about it. I put a marshmallow on the table and told you that if you waited for 10 minutes until I got back and didn’t eat the marshmallow while I was gone, I’d give you two marshmallows when I returned. But if when I came back you had eaten the marshmallow, I wouldn’t give you a second one.

    What did you do? You waited until I got back. And then I gave you two marshmallows which you promptly devoured with a big grin on your little face.

    I’ll probably wait until Alex is a little older to do this with him, but I think I’ll do it repeatedly over time (varying the reward) to reinforce the point that good things are worth waiting for.

    Note: The letter is long but worth reading and using as a model for your own letter to your children.

    "We’re on a Budget"

    I’m not sure where I read this terrific idea – probably one of my wonderful weekly Dollar Stretcher newsletters. If you don’t want to buy what your child is asking for but don’t want to lie and say you can’t afford it, instead say, “We’re on a budget.” Not only are you telling the truth, you’re also teaching your child the important skill of money management. I already use the phrase with Alex even though he’s too young to understand, and I’ll be using it for many years to come.

    Gerber Life Insurance: Is it Worth the Money?

    Even before my oldest was born, I’d see those ads for Gerber Life Insurance and think how absurd it was. After all, children don’t need life insurance because no one’s depending on them – especially not term insurance. But I recently received a solicitation for Gerber’s Grow-Up Plan, which is a whole life policy. Since we’d recently increased our own life insurance policies to provide for our new baby, I was intrigued.

    A whole life insurance policy covers you for your entire life, unlike term insurance, which only covers you for a specified period. A whole life policy also builds cash value – the insurance company takes a portion of your premium and invests it. A whole life policy is considerably more expensive than a term policy, which is why most finance experts don’t recommend them.

    The Gerber Grow-Up Plan got my attention because the premiums start low, due to the young age of the insured, and stay the same for the duration of the policy. But when I calculated the cost of a year’s premium on the maximum $35,000 policy for our two-year-old, it came to $305.76 (the monthly premium is $25.48). The policy would increase to $70,000 at age 21 and $350,000 at age 28. $305.76 per year for $350,000 of whole life coverage is a pretty darn good rate. Estimated quotes for a comparable policy from this aggregator are all over $1200 per year. And at least one expert feels that Gerber’s rates are generally competitive.

    However, the bottom line seems to be that the amount you’d pay out over the years to get to a $350K policy for just over $300 per year makes this investment a poor choice. As this Smart Money article points out, $100,000 in today’s dollars isn’t going to have the same value in 30 years. Additionally, whole life policies are generally not a good investment vehicle – in other words, the money paid for the premiums could be invested in other vehicles with a much better return.

    As an example, if I were to buy a $35,000 policy at $305.76 per year for our two-year-old right now, I’ll pay a total of $7949.76 over the next 26 years. Gerber doesn’t say on their website how the cash value will be calculated or what the rate of return is, only that “The plan accumulates cash value and will continue to do so as long as premiums are paid. After 20 years, the cash value is equal to or greater than 100% of premiums paid.” So that’s a cash value of at least $8,000 after 20 years. I’m guessing this is a generous estimate, but I’ll assume the money doubles in the next 6 years and that after 26 years, when our son is 28 and the policy value increases to $350,000, the cash value would be $18,000.

    But if I took the $305.76 and instead of buying the whole life policy, made monthly contributions of $25.48 to a mutual fund with a conservative annual growth rate of 8%, I’d have over $26,000. If the mutual fund grew at the S&P 500′s historical growth rate of 12%, I’d have over $54,000. (And I’d definitely invest the money in an S&P 500 index fund.)

    My conclusion: Gerber’s Grow-Up Plan is not worth the money.

    But don’t forget to take the money you might have spent on a life insurance policy for your child and invest it in a tax-advantaged education account like a Coverdell ESA or 529 plan instead!

    Read the updated 2012 review of the Gerber Grow-Up Plan.

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