Do you need 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 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.

Supplementing your company plan

If your company policy just isn’t cutting it, you can purchase additional coverage through your company, buy supplemental life insurance or both. 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 understand your life insurance needs, you’ll have to decide if it’s better to purchase additional insurance through your employer’s plan or buy a separate supplemental life insurance policy. Zadeh says 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.

“It’s always good to know the (insurance) company, how long they’ve been in business and what their ratings are,” Zadeh says.

Policyholders will also need to examine whether additional term insurance they purchase through an employer-sponsored plan can be converted down the road. While some term insurance policies can be converted to cash value policies after a certain number of years, some term insurance plans 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.”