Once in a while I see advertising that is very manipulative and that makes me angry.  As in, the anger caused by watching one person taking advantage of another person’s ignorance for their own gain.  Today this happened when I opened the mail to find a “Certificate” from Gerber Life to offer me the opportunity to pay for life insurance for a child or grandchild.

Ignoring the fact that I have no children, and therefore no grandchildren, the manipulative nature of this advertising as though it something to protect your child is infuriating.  If it was being honest, it would say this is an insurance product that pays you if your child dies!  Who needs that?  No one! The premise and subtle lies of this entire advertising campaign make me angry because these are the exact type of things that keep people from growing their wealth.

Since keeping your money is the driving principle of my education series, when I see products like this, that are only profitable for the insurance company, they make me very angry!!  And I feel compelled to tell everyone about it.

Before I rant about all the things I hate about this advertisement, let’s discuss Life Insurance and why you may or not need it.  Life Insurance should be a simple product for a very practical reason.  The main reason you need to buy life insurance is to protect people who depend on you in the event of your death by giving them the income lost from you not working.  For almost everyone, this can easily be thought of in terms of a spouse or children, who, if you are not around to provide for them, would significantly lose their quality of life.

If we do a thought experiment question:  what happens financially to those dependent on me if I die tomorrow?  From this answer we get all the information we need to determine whether or not you need life insurance and how much.

Let me answer this personally and then give some other examples.  If I were to die tomorrow, my wife would be the beneficiary of my estate.  While currently my wife is dependent on my income, she is fully capable of working to take care of herself if necessary.  However, she would likely need to sell the businesses that I own, she would likely want to sell our home and start a new life.  We have savings that would allow her to make payments on the home until she could sell it.  I would not want her to have to worry about any of these things immediately and have some financial flexibility so a policy of $50,000 to $100,000 should be enough to make sure she is taken care for the immediate future while the other assets that would transfer to her would ensure she is taken of long term.

Now, let’s change that situation and suppose we had a 5 year child.  While my wife might be able to return to work if I die to provide for that child, that would put a lot of additional stress on her to provide for herself and the child on her own.  To make it easy to discuss, let’s suppose that I wanted to buy enough insurance to provide for that child through at least high school.  A life insurance policy here would be to reduce the amount my wife has to work and pay for a lot of expenses for both my surviving spouse and child.  We sit down and do the math and decide that about $50,000 per year would be enough and that would be needed for 13-20 years. 

Take this situation one step further.  What if my wife and I both died, and our child needed to be raised by a family member?  What additional help would we want to provide, financially, for that family member?  We could calculate this as 15 years of expenses for the child so they can have their own room and financially be of no cost to our family.  We calculate those costs for everything to be about $20,000 per year.  13 years until they graduate from high school = $260,000.  College too?  Total might be closer to $350,000.

In the first scenario, I would need a very modest Life Insurance policy to make sure my wife is taken care of in the short term.  $100,000 seems very reasonable.

In the second scenario, being that it is my salary that would be lost to the family, a policy that needs to cover costs for my wife plus a child, allowing for some support for my surviving spouse, we might decide that $500,000 to $1M is more appropriate.

In the third situation, we find that less money is required because we only need to provide for our child and not a surviving spouse, we find that we are already covered based on coverage we would want for scenario number 2.

Now let’s flip this conversation around and ask what if my wife dies?  In scenario 1, I have no additional expenses to cover except the funeral costs.  That’s not worth a policy.  Because I have no reliance on her for household income there is no reason to have a life insurance policy on her.

In the second situation, if we had a child and my wife died, then I would have additional expenses that I don’t pay now for childcare, but I would also have reduced household expenses so those costs would probably be about the same.  Again, no need to have a policy on my wife. 

In the third situation, the policy on me would be sufficient to pay for our child’s expenses living with a family member.

Adjusting the example for a household that is closer to 50/50 for income between spouses, we find that we would need a policy on each parent to help with the lost income.  In this case, instead of one larger policy it would be better to have 2 policies more equally weighted.

Again, the point of Life Insurance is to replace lost income for those who are dependent on you.  The last consideration we have to make is the cost.  We can easily calculate how much we would like our surviving spouse and children to receive, but is it worth the cost?  While this will depend on your personal situation, we also need to consider that the more money the family pays for insurance, the less money it has for current expenses and savings.  While you may want to cover your family at some point we come to the decision point of amount of coverage and costs.

While you can calculate that continue to live the lifestyle you want, it may be more likely that you provide your family with enough money to help.  If you take another look at my situation, supposing we calculated that my wife and child would need $1M, this doesn’t all have to be included in a life insurance policy.  What about all the rest of the family’s assets.  My wife would receive the proceeds from the sale of my business, from our home and my retirement accounts.  If I add all those up, my family might be covered without a life insurance policy at all.

Life insurance therefore plays a role and is a tool for a time, and that is how it should be used.  As other assets grow, the amount of life insurance needed is reduced.  Think about a 50/50 couple with two children.  As those children get older, the number of years they need to provide for them goes down.  Also, as both parents get older, hopefully each of their retirement accounts is increasing, so the amount needed to leave a surviving spouse also goes down.  Once the kids have graduated high school and the parents both have sufficient retirement savings the need for life insurance will likely go away completely.

Understanding this concept is critical to making the right choices for your family on the amount and duration of a life insurance policy.  Term and amounts needed change over time.  As other sources of family wealth build, the need for life insurance goes down.

A critical word here is TERM.  That is the only type of policy most people will ever need.  If you are a high wealth individual or family, then a whole like policy to avoid estate tax my be a decent idea.  Otherwise, I would never, let me repeat that, NEVER BUY WHOLE LIFE policies.  Remember what I said above that life insurance is a tool.  Whole life policies are mixing the protection of tool with investments and adding a lot of complication to try to make life insurance the whole tool bag.  Don’t fall for the sales pitch.  Whole life pays out high commission and is great for the sales people and bad for everyone else.  Don’t use life insurance for savings or investing, keep it simple.  Use a hammer to hit nails, not glass.  Use insurance to replace income, not for investments.

And now for the rant! 

We can start with a certificate that I may apply for life insurance.  This implies that some condition has been met and that it is exclusive in some way.  Of course there is no condition that has been met, anyone can apply at any time.

The next thing is that this is marketed at as something that you are giving to your child or grandchild.  But you are the beneficiary so how are your giving it to them?  Oh, right, when they are 21 and the policy transfers to them then they now have a benefit of being worth more dead than alive, even if that is only $25,000.

A couple of weeks ago a guy called me to ask if I needed life insurance and my response was literally, “why would I want to be worth more dead than alive”.  As in, why would I want to give anyone a good reason to kill me, much less a million or more reasons??

The next thing this certificate promises is the right to buy more life insurance.  First of all, what 18 year old is short of the ability to buy life insurance.  More importantly, who do they have dependent on them that gives them the need to buy life insurance.  This is all fear mongering propaganda.  As you get older there may be some limitation based on your health that may prevent you from buying insurance, but even in the very, very rare circumstance that your child may not be able to buy a large life insurance policy, there are still other options.  Policy Genius even has an article that discusses policies that everyone is eligible for regardless of their condition.

Now I’m not spending too much more time on this, but my guess is that when these policies transfer the payments have to begin to be made by your child.  This way, most of the policies will go unpaid, lapse, and have zero benefit, except to Gerber Life.

Past the certificate part of this mailer is the actual letter.  Now it looks like I highlighted sections here, but I didn’t, they did.  Let’s examine all those highlighted parts.  First, wonderful for your child!!  WTF?  How is someone getting paid if you die wonderful for any child?  This is such a ridiculous statement that the only way I can describe it is shameful.  Next highlight – guarantees coverage for life.  Just after this is the catch, “as long as premiums are paid”.  Now there are several ways that premiums stop getting paid and this is exactly what they are counting on to make these policies even more beneficial to the company.

Gerber Life Insurance was sold to Western and Southern Financial Group for $1.55 Billion dollars.  That seems like a lot of value for policies on children.

The next highlight is that it is building cash value over time.  They will tell you what the premium rates are, but they will not tell you what the cash value is for the same premiums.  And typically buried in the fine print is language that says if they do not meet their investment goals then they can raise the premiums.  This has happened more and more the last few years and I expect it will continue as market returns remain low or negative.  When they raise the rates, then there will be more policies that go unpaid and see highlight above.  Previously I mentioned not to buy whole life policies as this cash value will be miniscule compared to how much money they make you pay, it always is or they wouldn’t have a company with profits and a value of $1.55 Billion!

Next highlight is a real doozy.  It says the “premium is locked in for life2”, but it has a superscript and when you read the fine print it says “as long as original payment method does not change”.  Therefore, to keep your premium from changing the same bank account has to be used for….. forever.  Change the account and boom, they can change your rates.  Even though the rates are ridiculous to begin with you can expect they will change, and this is the company’s ability to do that, even though they highlight that BS benefit.  Shame!!

The next highlight is the guarantee to buy insurance.  Already discussed, this is a very unlikely case and make no mistake, the rates will not be cheap even if there is a guarantee of coverage.  What they highlight in the previous section of rates not rising – that is until the payment method changes – they make no mention of here.  This makes this section extremely misleading.  The amounts they are promising to provide insurance for, without promising rates, are usually amounts anyone can find insurance for anyway.

The next highlight, when looked into, actually works against them, but they are selling you on this great “childhood rate.”  Using their rate sheet, let’s say you have a 5 year old that you put coverage on and the rate does not change.  For a $35k policy the rate is just over $25/month.  That is $300/year.  Were you to take that money and invest it at an 8% return, if you child lives to be 70, that account would have about $400,000 in it with compounded interest (before taxes).  The life insurance will still only be worth $35,000.

Not only are you not really investing in your child, you are buying a policy that pays when they die, if you invested the money for that policy instead of paying the premiums you would have almost 10X more money.  That is why this nonsense of covering children should be illegal and why the company is worth over a billion dollars.  It is stealing from people every day!!  Shame! Shame! Shame!

Mr. Keith M O’Reilly, who put his name on this letter to me, you should be ashamed of stealing money from hard working American families.  I’d bet that he doesn’t take out these policies on his own children, just sells this crap to people who think they are doing something for their children.

Hit me up at dave@keepyours.org if you’ve got questions or want to open a discussion. I’d love to hear your thoughts on this.

Watch our video on this here: