Supplemental Life Insurance

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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 2017 study by LIMRA, a life insurance and financial services research and consulting association, more people rely on group life insurance to provide fiscal stability than on individual insurance plans — a statistic that is rising each year.

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.

What is supplemental life insurance?

Supplemental life insurance refers to any life insurance policy that you have in addition to your basic life insurance coverage. Most commonly, this is insurance that is offered by the company where you work, on top of the free or low-cost group policy that many employers include as part of their benefits package.

A supplemental policy may come through your employer — but it doesn’t have to. And it may be worth considering depending on how much your employer’s policy offers to you and your family.

Supplemental life insurance is sometimes focused on a particular need. For example, some people will buy a supplemental policy to pay for funeral and burial costs, so as not to burden their survivors. A policy such as this may be for anywhere from $5,000-$25,000 or more.

If you are getting your supplemental policy through your work, it’s a good idea to sit down with your policy documents to see just how it is structured. Sometimes, a supplemental policy will only kick in once you’ve used the benefits from your other policies. There may be other restrictions as well.

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.”

But the biggest issue with an employee supplemental life insurance policy is this: for employees with dependents, company-sponsored coverage is rarely enough. Let’s say you’re making $70K annually as an accountant. Your employer offers free group life insurance equal to twice your annual salary. That seems, at first glance, to be generous.

But take a second look. That payout needs to cover the $220K mortgage on your home. Plus, you’ve got two kids who will need to have school fees and college tuition paid in the coming years. In addition, if your spouse doesn’t work, there are all the basic month-to-month bills to be paid, from heating to cable. That group insurance will go fast. You should really be looking at a policy for $500K or more to cover your family’s needs in the foreseeable future if something should happen to you.

Supplementing your company plan

If the scenario above sounds familiar, you need to consider supplemental life insurance. The first step to making that choice is figuring out how much life insurance you really need.

“Find an experienced person that deals with life insurance, and do a needs analysis,” says Lavine. “Typically, the insurance needs analysis results in people needing five to eight times their current wages in life insurance.”

A thorough needs analysis should consider two vital factors: the total amount of your current debts including your mortgage, car payments, student loans and credit card debt, as well as your share of future household expenses such as the cost of your children’s future college tuition.

Once you’ve determined how much coverage you need, your next step should be to see what your company offers in the way of low-cost supplemental coverage. But don’t stop there. Employees debating whether to apply for additional coverage through their company’s plan need to first evaluate how long they plan to stay with their current employer, since it might not be wise to purchase supplemental insurance through a company plan if you see a layoff or job change in your future.

You’ll also want to ask your HR rep if your company life insurance can be converted in the future. Some term policies easily convert to permanent life insurance if the need arises — but not all of them do; some cost an outrageous amount to convert or simply can’t be converted at all.

Dan Cotter, principal and director of risk management with Rehmann Financial in Westlake, Ohio, says policyholders thinking about purchasing additional insurance through a company plan should do some comparison shopping before taking the plunge. Premiums for an individual policy over a long period of time — Cotter says 10 years or more — can be less expensive than purchasing through a company plan.

Regardless of whether you purchase supplemental life insurance or additional company insurance, Cotter says to make sure to take any free life insurance your company is willing to offer. “I’ve never ever seen a case where someone has said that they have too much life insurance,” he says. “Never.”

Frequently asked questions

Is employer supplemental life insurance worth it?

It can be, but you’ll want to weigh your options as far as whether to purchase it through your employer’s plan or not. You may have more flexibility elsewhere and can choose a policy that fits your particular circumstances by exploring what’s available from independent insurance companies. A financial consultant or insurance professional can help you weigh the pros and cons.

What does supplemental life insurance cost?

The cost of supplemental life insurance varies greatly depending on what the claims payout would be, as well as whether you’re getting a subsidized policy through your employer or purchasing in the insurance marketplace. Other factors that may play a role include your health, age and whether the policy is term or whole life.