Everything You Need to Know about Supplemental Life Insurance

During my 9-to-5 employment days, I missed out on a perk that many large corporations offer: a group life insurance policy provided by the employer. Unfortunately, I never had the chance to experience this benefit as I didn’t work for a sizable company where such policies are common. I recall feeling disappointed that my former employer didn’t provide this option. Group insurance policies typically come at a significantly lower cost for employees, with some companies even offering them for free. However, one drawback is that the coverage under these policies is often limited. As a result, individuals seeking more comprehensive life insurance coverage may need to explore supplemental life insurance options.

In essence, any additional coverage obtained beyond the group life insurance policy offered by your employer is termed supplemental life insurance. But why opt for additional insurance on top of what’s already provided? Well, most group life insurance benefits typically offer coverage equivalent to one or two years’ worth of salary. For instance, if you earn $50,000 annually, this would translate to only $100,000 in life insurance coverage. For individuals with young children, substantial mortgages, or both, this coverage may fall short of their needs.

When it comes to life insurance policies, conventional wisdom suggests opting for coverage that amounts to ten to fifteen times your annual salary. For instance, for someone earning $100,000 annually, this would translate to a policy worth between one to $1.5 million. While this figure may initially seem substantial, it’s important to bear in mind that life insurance is designed to protect against the permanent loss of income. Consider how many years of income you have remaining in your career, not to mention potential future promotions or raises before retirement. Suddenly, ten years’ worth of salary doesn’t appear as significant.

In addition to salary considerations, there are other factors you should take into account when calculating your life insurance needs.

The general guideline in this scenario is to augment the policy by $100,000 for each dependent you have. However, in my opinion, this figure seems somewhat conservative, particularly for individuals with younger children. Consider that college tuition and living expenses for a four-year period alone could easily amount to $100,000 per child. Moreover, there’s the ongoing cost of raising children until they reach working age. It’s essential to reflect on the level of financial responsibility you’d like to leave for your designated guardians.

Calculate the amount of debt you currently carry. It’s crucial to ensure that your beneficiaries aren’t left to handle any outstanding debt on your behalf. While relinquishing a car to the lender might be manageable, losing the family home presents an entirely different challenge. Alongside the mortgage, it’s wise to have sufficient funds to cover your student loans or credit card debt. It’s important to note, however, that consumer debt isn’t inherited by your heirs. While safeguarding assets like the house or family vehicle is essential, your heirs cannot be compelled to settle your credit card debts. Nonetheless, creditors may attempt to recover funds from your estate, potentially reducing the assets available for your family.

Although it may seem insignificant compared to other expenses, it’s important to include any known costs in your calculations. Allocate between $8,000 to $15,000 to cover end-of-life expenses that the policy can address.

Consider whether you can manage the premiums. Typically, a higher potential payout corresponds to higher monthly premiums, and this is an unavoidable reality. If you find yourself unable to afford the monthly payments, you may ultimately allow your coverage to lapse. In such a case, having a higher policy limit becomes irrelevant.

The extent of your hard assets directly influences the necessary amount of life insurance coverage. When my father passed away, he possessed a $50,000 life insurance policy. Despite being well into retirement, he maintained an old policy that no longer required monthly premiums. While $50,000 constituted a substantial sum, it wasn’t a life-altering amount. Fortunately, my parents had accumulated sufficient savings, ensuring that no one relied solely on that payout. Consequently, $50,000 proved adequate for his circumstances.

If you possess significant equity in real estate, stocks, or other investments, you likely require a lower amount of life insurance. Your heirs can sell the property or liquidate the assets to substitute for your income instead.

Supplemental life insurance obtained through your employer is likely to be more costly compared to purchasing it elsewhere. Insurance companies understand that it’s more convenient for individuals to acquire a policy from the same insurer providing their basic coverage, giving the insurer more pricing leverage. After all, they’re in the business to turn a profit. This rationale is understandable.

Furthermore, a drawback of supplemental insurance pertains to its portability. Typically, group insurance policies are employer-owned, thereby linking your policy to your employment. Although the policy may remain effective for a period after quitting or being terminated, transitioning to an individual policy upon leaving your job may result in higher premiums for the same coverage.

Given these considerations, obtaining life insurance from a private insurer rather than opting for supplemental insurance through your employer may be a more favorable option. However, individuals with health conditions or habits that can increase life insurance premiums—such as smoking or engaging in extreme sports—might still find supplemental insurance appealing.

Supplemental coverage offers a convenient means of securing life insurance, with HR handling paperwork and monthly premiums deducted automatically from your paycheck. However, convenience often comes at a cost, and supplemental life insurance typically entails higher premiums.

For individuals in relatively good health, it’s advisable to explore options with private insurers to obtain a policy. At the very least, shopping around can potentially lead to finding a more cost-effective solution. By investing some time in the process, not only can you save money, but you’ll also gain a clearer understanding of why you selected specific policy limits.