Open enrollment is RIGHT NOW for many employers. It’s a great time of year to do your homework and make some changes with your employee benefits. One area you may want to take an extended look at is supplemental life insurance.
According to the BLS, 60% of US employers offer life insurance benefits for full-time employees, much higher than I had expected. This life insurance coverage typically comes in the form of a basic term life insurance plan that is a multiple of the employee’s annual salary (I’ve seen as low as 1X and as high as 3X, but I’m sure some go higher). This amount is paid to the listed beneficiary in the unfortunate event of the employee’s death, if the policy is still active at the time of death. Some employer’s make you opt in to this basic insurance coverage, but there is typically not a premium charge for this coverage.
In addition to employer-sponsored basic term life insurance plans (which are a no-brainer if your employer is offering to pay the premiums), many employers will also offer a voluntary supplemental life insurance. This is where things can get a bit tricky for the employee. What is supplemental life insurance and should you buy it through your employer? Let’s take a look…
What is Supplemental Life Insurance?
Supplemental life insurance offered by an employer is additional term life insurance that you can purchase that is above and beyond the employer-provided basic coverage. As with basic coverage, it usually can be bought in the form of a multiple of your annual salary. And it is deducted from payroll.
For example, if you choose to elect supplemental coverage of 4X annual salary and you have 3X annual salary through your employer’s basic plan, then you will be covered for a total of 7x annual salary coverage (4X from voluntary supplemental life insurance + 3X from basic life insurance).
Additionally, some supplemental life insurance policies allow you to purchase coverage for a spouse and/or children (note: I have yet to see a worthwhile scenario to purchase a life insurance policy for a child).
Benefits of Supplemental Life Insurance Through an Employer
Here are the biggest benefits of buying supplemental life insurance through your employer:
- Rates: Employers get a group insurance rate (similar to group health insurance), which can be lower than individual life insurance rates that you might find elsewhere. The employer might even subsidize part of the premiums. If you are not in the best of health, you might pay significantly less through a group plan than individually (more on that in a bit).
- Insurability: It’s much easier to get insured through a group plan and you pay the same rate as everyone else. don’t need a medical exam for group insurance. With most group life insurance policies you need to answer some medical questions before qualifying for coverage, but you don’t need to take a medical exam or provide the same level of detail that you need to provide for individual coverage.
- Ease: With a few clicks of button (or medieval paperwork), you’ve got yourself a term life insurance plan. No need for lengthy questionnaires or medical exams.
Downside of Supplemental Life Insurance Through an Employer
Here are the biggest downsides of buying supplemental life insurance through an employer:
- Rates: Wait, didn’t I just write that rates can be lower through a group supplemental policy than individual? They can be, but it’s not a guarantee. If you are a young, healthy, non-smoker – then you may be able to get an individual plan for cheaper than a group rate. This is because group plans include employees of all ages and health. Life insurance is very similar to health insurance in this regard.
- Portability: Employer life insurance policies are rarely portable, and if they are, it typically comes with higher rates. If a plan is not portable and you leave your employer, your policy ends. This can be a big downside because it may force you to go shopping for life insurance each time you leave an employer (particularly if the next one doesn’t offer a supplemental policy). And as you age, the price of individual insurance will increase. If you buy an individual plan you can lock in a rate for 10, 15, 20, 25, or 30 years. The average duration of employment is less than 2 years for those in their 20’s and early 30’s.
- Customization: You don’t have the ability to be as custom with an employer-sponsored policy – such as adding things like an accelerated death benefit.
How Much Supplemental Life Insurance Should you Buy?
As mentioned earlier, open enrollment is right now for most employers. It’s a great time to shop and compare the premium rate your employer is quoting for their supplemental group policy versus what you can get individually.
I previously gave an in-depth overview of how much life insurance you should buy. All the same rules apply, whether you are buying through a group employer plan or through an individual plan. Shop around, find the best price (individual or group through your employer), and buy only what you need. Good luck!
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