insurance

Do you need supplemental life insurance?

happy family of four in home
Highlights
  • Employees don't have to show proof of insurability to obtain group insurance.
  • Company life insurance policies are generally designed as one-size-fits-all.
  • Company coverage is rarely enough for employees with dependents.

The good news is your company offers life insurance as part of an employee benefits package. The bad news is it may not be enough. You may need to look into supplemental life insurance to fill in the financial gaps.

According to a 2010 study by LIMRA, a life insurance and financial services research and consulting association, 1 in 4 U.S. families relies on group life insurance to provide fiscal stability in case a wage earner dies. However, while employer-sponsored group plans are often free or substantially cheaper than individual life insurance policies, experts say group plans rarely provide enough coverage and could potentially leave you high and dry if you lose your job or move to a different company.

Here's how to determine whether your employer-sponsored life insurance policy is covering your needs.

How employer-sponsored plans work

If you're lucky enough to have some free life insurance offered through your company or your spouse's company, take it, says Bill Suneson, co-founder and president of Next Generation Insurance Group in Boston.

"Typically, employers offer (their employees) a term life policy," he says. "The key advantage is that you don't have to show proof of insurability."

Unlike individual life insurance plans that require policyholders to undergo a medical evaluation to obtain insurance, employer-sponsored group policies offer coverage to all employees for the same rate, even those who may be rejected from individual plans. Employer-sponsored plans present a few problems, says Suneson. Because they're created to cover a group, company life insurance policies are generally designed with a one-size-fits-all mentality and may not include certain riders, such as long-term care or accelerated death benefits, that supplemental life insurance can provide.

"There's also the issue of whether you'll lose the coverage if you leave the company or get laid off," says Alan Lavine, co-author of the book "Short and Simple Guide to Life Insurance." "You could be out of luck if (your policy) is not transferable."

The major problem with employer-sponsored life insurance is most companies simply don't offer enough. Employers who offer life insurance benefits typically pay for coverage equivalent to one to two times the employee's salary, says Steve Zadeh, manager of sales development for Kansas City Life Insurance Co. in Missouri.

"For a young, single employee who's renting an apartment and has very few debts or obligations, that's probably fine," he says.

For employees with dependents, company-sponsored coverage is rarely enough. Zadeh says most group plans allow employees to buy a certain amount of additional coverage, but even that might not be enough. Employees may have to undergo medical underwriting to qualify for the supplemental life insurance, and it could be more expensive than purchasing a separate, individual policy.

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