When Should You Get Supplemental Life Insurance?

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 a company offers is insufficient, particularly if the employee has a large family or significant financial liabilities. In those situations, supplemental life insurance can bridge the shortfall in coverage and provide added protection.

Key Takeaways

  • 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 for many individuals.
  • According to the Life Insurance Marketing and Research Association (LIMRA), in 2021, more than half of employers offered life insurance to their employees.
  • Term life has a cut-off date for insurance payouts.
  • Most employers offer one or two years' salary as a death benefit.

Term Life May Not Be Sufficient

Most consumers purchase one of two types of life insurance—term life insurance or whole life insurance. Both employers and private companies offer term insurance. The insured receives coverage for a set period with term life insurance, known as the insurance policy term. Since the coverage only applies during a specified 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. According to the Life Insurance Marketing and Research Association (LIMRA), in 2021, 57% of workers have life insurance through their employers. However, LIMRA also found that only 29% of employees believed their employer's insurance was enough.

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. This may be adequate for a single employee or an employee with one dependent.

However, an employee with a more prominent 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 Insurance Is Expensive

Whole life insurance 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 additional insurance may have limitations, so it is essential 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 or their 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 their 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 insurance company.

Most employer-based life insurance plans do not travel with you when you switch jobs or retire.

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 typical 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 buy the right amount of coverage. If the employee leaves the company, they will keep the supplemental coverage. Furthermore, if life situations change, the individual can adjust their amount of coverage accordingly.

The Bottom Line

In an uncertain 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. And 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 they're getting the best life insurance policy possible.

Article Sources

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  1. Life Insurance Marketing and Research Association. "Facts About Life 2021: Workplace Benefits."

  2. Life Insurance Marketing and Research Association. "Top Misconceptions About Life Insurance."

  3. U.S. Bureau of Labor Statistics. "Employee Tenure in 2020," Page 1.