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Supplemental life insurance: What is it & who needs it?

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6 mins

Today’s employers know that the market is very competitive for people having exceptional skills. Because of this, employers need to offer comprehensive employee benefits programs to attract and retain these talented individuals. Their benefits package usually includes group health insurance. Another benefit that many employers offer is group life insurance coverage.

According to research by the Society of Human Resource Management, 85% of companies have group life insurance as part of their benefits package.

A group policy provides life insurance coverage to a group of people, including employees of a company or organization. With group life insurance at work, the employer owns the policy, and it covers the employees. The cost of this life insurance is typically less than what employees pay when buying individual life insurance.

Group life insurance is a great benefit, but it may not provide sufficient coverage if you have a family or other people who rely on your income. Here are some of the particulars about group life coverage that will help you decide if you should enroll in your employer’s plan — and if you need a supplemental policy, too.

Do I need supplemental life insurance?

There are two important questions you should ask yourself when deciding whether or not to enroll in your company’s group life insurance plan when it’s offered to you:

  1. How much of a financial burden would be placed on others if I died today?
  2. Is my current life insurance enough to meet my loved one’s needs?

Life insurance companies will tell you that you need anywhere from 5 to 20 times your annual income of life insurance coverage to adequately protect your beneficiaries financially. Each person’s situation and needs are different.

The amount of coverage you decide upon will depend on the things you’re financially responsible for. Here are some instances where enrolling in the group life plan might make sense for you:

  • You have children or aging parents that rely on your income
  • You buy a home and need additional coverage to pay off the mortgage if you died
  • You have a spouse that relies on your paycheck
  • Your income is increasing, and you need coverage to keep up with your new lifestyle
  • You have kids starting college, and you need coverage to make sure they can complete their education

Supplemental group life insurance offered through work

Group term life insurance is typically the type of life insurance employers offer, and coverage is conditional on your employment. Some group life insurance is “portable,” meaning you can take it with you if you leave the company.

These are the four main types of life insurance employees are offered at work:

  1. Supplemental employee life insurance that adds coverage to the free life insurance provided by your employer
  2. Supplemental spouse life insurance that covers the life of your spouse or domestic partner
  3. Supplemental child life insurance that covers eligible dependents
  4. Supplemental accidental death and dismemberment insurance (AD&D) that covers you in addition to your basic policy. It pays an additional benefit if you die or are seriously injured in an accident.

In many cases, you’re required to buy a supplemental policy on your own life before you’re eligible to buy supplemental spouse or child life insurance.

Supplemental life is guaranteed coverage

Typically, you automatically qualify for basic life insurance policies offered through an employer regardless of your age or medical history. For supplemental life insurance, companies will only guarantee approval of your enrollment up to a set amount of coverage, such as $100,000 or 2x your salary.

If you’d like to buy more than that amount, you’ll most likely need to complete a separate application and/or medical exam to prove that you’re an acceptable risk to the insurance company. Your employer may offer guaranteed coverage only during initial enrollment or open enrollment periods.

Supplemental life insurance through private insurers

You’ll find a much greater choice of supplemental life insurance products than your employer offers on the open market when you buy as an individual.

If you search for supplemental insurance on your own, what you’ll find might be:

Supplemental life insurance purchased individually allows higher coverage amounts than what you can get at work. However, the rates will be higher, and your age and health may determine the amount of coverage you’re eligible for.

Cost of supplemental life insurance

When insurers calculate rates for group life policies, they consider data about the entire group, such as the number of employees and their average age. This differs for every company, so you’ll find a significant difference in rates from one employer to the next. For example, at your current company, you may be able to buy $500,000 of coverage for $500 per year, but if you move to another company, you may only be able to apply for $250,000 of coverage for the same price because of the demographics of the employees at your new employer.

Unlike individual life insurance coverage, premiums are not locked in through work, meaning that your premium will increase with age. For example, a $500,000 policy for a 30-year-old may cost $175 per year, while the same amount of coverage for an employee age 65 or older could cost as much as $5,000 per year.

Supplemental life insurance exclusions

There are instances where your group life insurance plan won’t pay out a death claim. For example, your policy may exclude death by suicide or self-inflicted injury within the first two years that an employee is insured by the group policy.

As with any insurance you buy, read your policy, so you know exactly what you’re getting. Supplemental life insurance is a valuable benefit that offers employees the additional protection they need for the benefit of their loved ones.

Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published April 21, 2021
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