There's a saying that grandchildren are life's greatest bargain because you can give them a handful of loose change and they'll give you a million dollars worth of pleasure. With that in mind, putting more serious dollars to work in order to provide those grandchildren with a lifetime of pleasure seems like a no-brainer.
And that's precisely what Commemorative Life Insurance Services is hoping you'll think about AfterThoughts Birthday Insurance, a product that seems like a wonderful idea until you contemplate it seriously.
"Birthday insurance" doesn't actually ensure that you'll live to the next party nor does it cover the party costs if you don't live that long. Instead, this is life insurance that sends your grandchildren a birthday card, and a check, for the rest of their lives, potentially for decades after you are gone.
Birthday insurance is a weird idea, executed in a bizarre fashion. At first, the eternal birthday gift seems charming. The more you think of it, however, the more it goes from being gimmicky to being icky, to being downright ghoulish. And that's before you look at the numbers and see that it's a bad buy to boot.
Effectively, you are using life insurance to endow a birthday card and gift check.
"There is nothing else like it out there," says Mike Struhs, president of Commemorative Life, on a video on the company's Web site, www.birthdayinsurance.com.
"Every other insurance product is designed as a wealth-transfer or financial-planning tool of some sort. This is not designed to transfer wealth. This is designed to transfer memories. That it's allowing people to have their memories stay alive for years and years and years after they have passed away, that's what makes this product unique."
It's different all right, because that focus on the heartstrings clearly diverts consumers' attention from what they are paying for -- a poorly priced financial-planning tool -- and what they get for their money.
Once you die, the grandchild gets an annual card and a check of $100, $250 or $500, depending on what you sign up for. The money comes with a "personalized" greeting card, or one that is as personal as you can make it in the 30 characters Commemorative Life gives you to make a statement designed to feel alive and vital decades after your death.
The card never changes, the dollar amount never changes and the sentiment never changes (and neither does the status of the giver).
Numbers add up badly
Strip away the sentiment and you are left with a whole life insurance policy that has an illiquid death benefit that pays out a small interest amount annually to beneficiaries. Apply some numbers and things get positively goofy.
Say a 70-year-old grandmother of three wants birthday insurance to make $100 annual gifts. While she is alive, she'll pay $221.45 per child per year (more if Grandma smokes) or roughly $665 per annum to secure $300 in annual future benefits. (The good news is that if she wants to start giving a $100 birthday gift while she's alive -- which might make the insurance gesture more meaningful by continuing a tradition -- it will only cost her $300, plus the cost for a card and postage stamps.)
Because she's shopping for a benefit -- $100 a year -- rather than a specific coverage amount like, say $10,000, there's little doubt that she is overpaying for the coverage. Mass-market insurance programs -- those with few or no medical questions -- tend to be priced for the person with one foot in the grave; because the grandparents are focused on the legacy, they're probably not focused on price and the ability to buy a policy for less.
If that 70-year-old grandma reaches the average life expectancy for a woman that age, she will die at age 85 having paid just under $10,000 in premiums for the coverage. Had she simply invested the same dollars at a reasonable rate of return, she'd have more than $15,000 that she could split between the kids; as adults -- which those grandchildren would be after 15 years -- that bigger one-time gift might be a bit more meaningful, especially if it comes with instructions or life lessons for its use.
The policy does have a guaranteed minimum annual interest rate of 3%, which can rise based on market conditions. But since the policy could be in effect for seven or eight decades, it's hardly growing at market rates. Still, insurance buyers may find that the crucial element -- aside from the birthday sentiments -- is the guarantee.
What will Grandma's legacy be?
Martin Andelman, chief executive officer at Commemorative Life, points out in an email that grandma might die well before she amasses that kind of savings. "God forbid Grandma should leave us at 75 years of age," he writes. "If that's the case, she'll only leave behind ... roughly $1,200 a piece (by saving the premium dollars). Personally, I'd rather see grandma spend her $665 each year at the bingo parlor than leave each grandchild a paltry onetime pretax windfall of $1,200."
"Forgive me," he added parenthetically, "but I just can't imagine ever hearing anyone say: 'I'll never forget Grandma ... she left me $1,200 when she died.'"
I wouldn't expect anyone to say that about Grandma regardless of the dollars involved, whether it's $100 a year (plus a gift card!) or six figures. Presumably, all grandparents want to be remembered for something other than providing a regular gift check, or a lump-sum inheritance. What makes a bequest memorable, in all likelihood, will be what the recipient does with the money rather than how it is given. Speaking of the check, the $100 annual "gift" becomes less and less financially meaningful over time. Say the youngest grandchild was a year old when the policy was purchased, and 16 when grandma died; if she lives to age 80, she'll get 64 birthday cards. Factor inflation into the equation and you'll see that the $100 delivered on her 75th birthday -- five decades after grandma is gone -- will have the same buying power as about $15 has today.
Andelman pointed out that the grandchild might use the policy to fund birthday insurance for their own grandkids someday. That's a great idea, but it's not explained on the annual birthday card or on the firm's Web site, both of which are devoid of information on how the grandchildren might factor the policy into their estate.
"This became a stupid idea the minute you were paying more than $200 to give your grandchild a $100 benefit," says insurance consultant Dave Bohannon of Louisville, Ky. "You can create a legacy, but you want to do it while you are alive and you want to make it meaningful. ... You want your grandchildren to know about you and to learn from you, but if you do this they will eventually come to the conclusion that you fell for a gimmicky sales pitch."
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