When should you get supplementary life insurance?

Employers usually provide term life insurance for their employees, and the amount of insurance is usually several times the employee’s annual salary. However, sometimes the insurance provided by the company is insufficient, especially if the employee has a large family or large financial liabilities. In these cases, supplementary life insurance can make up for the lack of coverage and provide additional protection.

Key points

  • Employer-sponsored supplementary life insurance eliminates the need for medical examinations, but it usually has major limitations.
  • Private supplementary term life insurance may be the best option for many people.
  • According to data from the Life Insurance Marketing and Research Association (LIMRA), only 48% of employers provided life insurance to their employees in 2017.

The deadline may not be enough

Most consumers buy one of two types of life insurance-term life insurance or whole life insurance. For term life insurance, the insured will be covered for a certain period of time, which is called the period of the insurance policy. Both employers and private companies provide term insurance. Since coverage only applies to a fixed term, the cost of term life insurance is usually lower than that of whole life insurance, which covers the entire life of an individual.

A major problem with term life insurance is that most policyholders rely on their employers to purchase this insurance, so they may not have adequate protection. According to data from the Life Insurance Marketing and Research Association (LIMRA), only 48% of employers provided life insurance to their employees in 2017.

A LIMRA survey in 2021 found that only 29% of employees believe that the insurance provided by their employer is sufficient. A typical employer plan provides insurance equivalent to one to twice the employee’s annual salary. For example, an employee with an annual income of US$60,000 may receive a policy of US$120,000 for free. For a single employee or an employee with one dependent, this may be sufficient. However, if a spouse or child dies unexpectedly, employees with many family members may need several times the insurance amount to take care of them. Supplementary insurance can fill the gap in employer-sponsored plans.

Expensive for a lifetime

Whole life insurance policies have similar underwriting gap challenges. Most whole life insurance policies cover an individual’s lifetime and accumulate cash value, which allows the insured to cash out the policy when needed. However, because whole life insurance provides more complete protection, its cost is much higher than term life insurance. For individuals in a large family, obtaining the right amount of whole life insurance can be very expensive. Generally, purchasing supplementary term insurance provides a more cost-effective option.

Employer supplementary insurance has restrictions

Consumers usually purchase supplementary insurance through their employers. One advantage of this is that employees can bypass the medical examinations required by private insurance companies. However, employer-sponsored supplementary insurance may have limitations, so it is important to study insurance coverage carefully.

First, coverage may be a form of accidental death and dismemberment (AD&D) insurance that pays the beneficiary only when the employee dies or loses limbs or hearing or sight due to an accident. Second, employer-sponsored insurance may be a form of funeral insurance policy. In this case, the insurance only covers the funeral expenses of the employee, and the limit may be between US$5,000 and US$10,000.

Finally, and perhaps most importantly, most employer-sponsored supplementary plans are not portable. Therefore, if an employee voluntarily resigns or is dismissed, the insurance will be terminated and the person must apply for insurance in a new job or through a private insurance company.

Private supplementary insurance may be the solution

Some employers provide employees with the option to purchase supplementary life insurance to increase coverage and there are no regulations, such as AD&D or funeral insurance. This option may be ideal for employees with more families, although this type of insurance usually lacks the portability of private insurance.

Since a typical employee has worked with the employer for less than five years, purchasing supplementary insurance through a private carrier may be a better option. Employees can determine how much they need to be higher than the amount provided by the employer and purchase the appropriate amount of insurance. If employees leave the company, they will retain supplementary insurance. In addition, if living conditions change, individuals can adjust their insurance amount accordingly.

Bottom line

In an uncertain world, having the right amount of life insurance becomes more important than ever. Although many employers provide employees with free term life insurance, the coverage may not be sufficient. Whole life insurance may cost too much. Buying private supplementary term life insurance may be the answer. That said, employees should still make sure to compare anything provided by their employer with plans of other companies to verify that they have the best life insurance policy.

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