Employers generally provide term life insurance coverage for their employees, and the amount of coverage is typically some multiple of the employee's annual salary. However, sometimes the amount of coverage that a company offers is insufficient, particularly if the employee has a large family or big financial liabilities. In those situations, supplemental life insurance can bridge the shortfall in coverage and provide added protection.

Key Takeaways

  • A 2015 study by the Life Insurance and Market Research Association (LIMRA) found that 65% of employees with employer-sponsored life insurance believed that they needed more insurance than the employer provided. 
  • Employer-sponsored supplemental life insurance waives the need for a medical exam, but generally has significant limitations.
  • Private supplemental term life insurance may be the best option.

Term Life May Not Be Sufficient

Most consumers purchase one of two types of life insurance—term life insurance or whole life insurance. With term life insurance, the insured receives coverage for a set period, which is known as the term of the insurance policy. Both employers and private companies offer term insurance. Since the coverage only applies during a set period, term life insurance generally costs less than whole life insurance, which covers an individual for their entire life.

One major problem with term life insurance is that most policyholders rely on their employer for this insurance, and as a result, they may not have enough coverage. About three in 10 people have life insurance through their employer, according to a pre-COVID-19 2020 survey conducted by the Life Insurance and Market Research Association (LIMRA). A 2015 study by LMRA found that 65% of employees with employer-sponsored group life insurance believed that they needed more insurance than their employer provided. A typical employer plan provides coverage equal to one to two times the employee's annual salary. For example, an employee making $60,000 annually may receive a $120,000 policy at no cost. For a single employee or an employee with one dependent, this may be adequate. However, an employee with a bigger family may require several times that amount of coverage to take care of a spouse or children if they unexpectedly die. Supplemental insurance can fill in the gaps of an employer-sponsored plan.

Whole Life Is Expensive

Whole life policies present similar coverage shortfall challenges. Most whole life policies cover individuals for their lifetime and build up a cash value, which allows the insured to cash out the policy if needed. However, since whole life insurance offers more complete coverage, it costs much more than term life insurance. For an individual with a large family, obtaining the right amount of whole life insurance may be prohibitively expensive. Generally, purchasing supplemental term insurance offers a more cost-effective option.

Employer Supplemental Insurance Has Limitations

Consumers often purchase supplemental insurance through their employers. One advantage of doing so is that the employee bypasses the medical exam that a private insurer would require. However, employer-sponsored supplemental insurance may have limitations, so it is important to research the coverage carefully. First, the coverage may be a form of accidental death and dismemberment (AD&D) insurance, which only pays the beneficiaries if the employee dies from an accident or loses a limb, hearing or sight as a result of an accident. Second, the employer-sponsored coverage may be a form of a burial insurance policy. In this case, the insurance only covers the funeral and burial costs of the employee and may have a limit of between $5,000 and $10,000. Finally, and perhaps most importantly, most employer-sponsored supplemental plans are not portable. Therefore, if the employee leaves his or her job voluntarily or is terminated, the coverage is terminated, and that person would have to apply for coverage at a new job, or through a private company.

Private Supplemental Insurance May Be the Solution

Some employers provide employees with the option to purchase supplemental life insurance that increases coverage and does not have stipulations, such as AD&D or burial insurance. This option may be ideal for employees with larger families, though such insurance also usually lacks the portability of private insurance. Since the average employee remains with an employer for less than five years, purchasing supplemental insurance through a private carrier may be a better option. Employees can determine how much they require above the employer-provided amount and purchase the right amount of coverage. If the employee leaves the company, they would keep the supplemental coverage. Furthermore, if life situations change, then the individual can adjust their amount of coverage accordingly.

The Bottom Line

In a post-COVID-19 world, having the right amount of life insurance has become more important than ever. Although many employers offer no-cost term life insurance to their employees, the coverage may not be sufficient. Whole life insurance may be cost-prohibitive. Purchasing private supplemental term life insurance could be the answer. That said, employees should still make sure to compare anything their employer offers with the plans of other firms to verify that they're getting the best life insurance policy possible.