My son-in-law isn't the brightest bulb and he is very stubborn.   He
wants to set up a life insurance fund for their child, due Dec. 5th. 
My gut says life insurance funds are not the way to go, but I would
like an easy to understand explanation to give him as to why that
isn't the best way to save money for the child.  But what is the best,
or a better, way to set up any kind of fund for your children/grand
children?  Something easy for him (and me) to understand.  The
"parents" have very limited income, my husband and I can, and do,
contribute to them financially as needed, but we have not designated
any specific amount of money for grandchildren yet.  The son-in-law is
not planning for us to start or specifically contribute to this life
insurance. We would just continue helping them out here and there, as
we have been for the past 5 years. They can do what they want/need
with our financial assistance. This is the first grandchild, of course
I don't know what future children may be involved.

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Request for Question Clarification by vercingatorix-ga on 03 Dec 2004 12:45 PST

I have an answer for you, but I want to ensure it's what you seek
before I write it up.

Basically, I can provide you with a simple and short (2 minutes or
less) explanation why life insurance is not the way to go. You can use
this to try to convince your son-in-law of the error of his ways.

Then, I can provide you with a half-dozen superior alternatives your
son-in-law can set up, some tax-deferred and some not.

Then, I can explain how you can handle set up these alternatives on
your own, with or without your son-in-law's knowledge or consent. This
will prove valuable if he fails to listen to reason and does indeed
buy the life-insurance policy.

If this is what you seek, I'll gladly provide it.

V

It cannot be a straight 'Life Insurance' policy
- that is something that pays out if the nipper dies.

Talk to a certified financial planner and they can guide you in the
right direction.  Life insurance is a good idea but the bad part is
that someone has to die before it is collected.  Many financial
planning books suggest that saving money (by regularly and
consistently depositing various amounts--tens, hundreds of dollars or
whatever you can afford) in a money market account or mutual fund
account would accumulate substantially over 18 years (if we assume the
money is being saved for kids to go to college it will take about 18
years before they are ready to go to college) and might even double or
triple in value and would be worth anywhere from $20,000 to $100,000
or more because of compounding.  If it were me I would have a mix of
life insurance premiums and money market account.

4KEITH (I'm NOT a GOOGLE Researcher)

I highly recomend a Coverdell Education Savings Account (formerly Education IRA).  
-You can contribute up to $2000 yearly ($167 per month or less of course)
-It will earn interest (varying with the type of investment)
-It can be used on any primary or secondary education (chosen by you.. the donor)
-It can be used for 1 or for multiple people should you have more
grandchildren in the future
-The money is tax free when withdrawn assuming it is used for education

If you can invest $100 per month into this type of account then
assuming 10% interest (a moderately risky rate, but fairly safe
considering you have 18 years to grow your money) then your
contributions would total $21,600 over 18 years, but the account with
interest will have grown to $45,600 (more than doubling your money)

Here is a site comparing this and other plans, and has a link to
enroll should you choose to do so with this organization.
http://www.theeducationplan.com/learn/529optionsComparison.shtml

As others have stated, someone does have to die in order to collect
anything from life insurance.  If they are expecting to die then it's
unlikely that anyone would insure that person, and if they're not
expecting to die then investing is most likely going to have better
returns than insurance.

Terribly sorry, I had bad math skills in my last post that I just caught...

"but the account with interest will have grown to $45,600 (more than
doubling your money)"
That value should be $54,700.

Here is a calculator should you want to check for other values or
interest rates.  The tax rate will be 0% should you use the money for
education.
http://www.tcalc.com/tvwww.dll?Save

Life insurance as an investment is less advantageous than other
investments primarily because of the costs involved.  With life
insurance, whether whole-life or variable-universal-life, or others,
you are paying for life insurance in addition to the investment.  The
problem is that your investment will be smaller because it costs more
than if you keep your apples apples and your oranges oranges.  If you
want life insurance, buy life insurance.  If you want an investment,
don't make it more expensive than it has to be.  Separating the life
insurance from the investment will almost certainly be cheaper for
both than mixing them together.  And yes, I know the life insurance
salesperson will disagree but all it takes is to write the
alternatives out side by side to see and to remember where their bread
is buttered.  A "fee for service" certified investment planner
wouldn't have anything to gain by pushing any particular type of
investment.

If you want an investment for the grandkids, take a look at these
better alternatives:

1.  Coverdell Savings Account (Education IRA):  $2,000/yr. tax deferred.
2.  529 Plan: Look at www.vanguard.com or www.troweprice.com for some
excellent examples.  You can invest not only tax deferred but, if the
money is taken out for education related expenses, they don't pay tax
on the earnings either.  With a 529 plan, you also keep control over
the money which is a plus.
3.  There are also State Pre-Paid Tuition Plans which can be a good deal for many.

Good luck with son-in-law.  I have 529 plans for my kids and I have
life insurance.  I looked at Variable Universal Life and the other
options but their costs were higher.  It's the cost that killed it for
me.