Why you should consider buying supplemental life insurance – or not

Many employers provide group life insurance as an employee benefit because it helps support employees’ financial wellness. But it's important to note the difference between basic and supplemental life insurance: Basic coverage may be one or two times your salary amount. While that may provide enough protection for some, other employees may need additional coverage. So, many companies give them the option to purchase a supplemental life insurance policy on a voluntary basis. Since employers buy for many employees at once, group life insurance policies offer a number of advantages compared to a life insurance policy bought by an individual:

  • Lower premium payments  Group life rates are typically lower than those for a comparable individual policy
  • Simple qualification  There’s usually no need for a medical exam, and it's easy to apply for because your employer already has your personal data
  • Easy payroll deduction  It’s automatically taken out of your pay

While the advantages of supplemental life insurance can be easy to understand, that doesn’t mean it’s always right for your needs. Before signing up for supplemental life at work, find a few things out. You’ll be able to get important information you need on your company’s employee website, in your benefits materials, or by talking to an HR manager. Here’s what to look for:

  1. How much employer-provided coverage do I already have? Basic employer-paid coverage typically equals 1x – 2x your salary, but it could be another amount – or nothing at all. If you don’t already know what you have, find that out.
  2. What kind of supplemental coverage is available? Most supplemental plans offer a type of term coverage called yearly renewable term life insurance. This type of life insurance policy is different from a 10- or 20-year term policy because you’re buying coverage for one year at a time, and the premiums can (and likely will) go up slightly from one year to the next. Some employers also offer voluntary permanent life insurance, which can enhance your protection. You get group life coverage that lasts through retirement – and while the rates are initially higher than term life, they never increase. The policy can also build tax-deferred cash value that can be used for loans or withdrawals during working and retirement years.2, 3, 4 Some employers give you the option to buy additional coverage for a spouse, domestic partner, or child, but typically you first have to buy supplemental coverage for yourself. Finally, your employer may offer accidental death and dismemberment (AD&D) insurance for additional financial protection by covering accidental death and injuries.
  3. Is your coverage portable? Portability means you can take your policy with you – and still enjoy the benefits of group life insurance coverage – if you leave your employer. Employer-paid life insurance may or may not be portable, but supplemental policies are usually portable. While non-portable insurance isn’t necessarily a deal-breaker, you need to remember that you can only count on being covered for as long as you stay at your company. 
  4. Is my workplace coverage enough for my needs? If you have employer-provided coverage of 1x – 2x your salary, that may be enough for your needs, especially if other people don’t depend on your income. However, if you have young children or other dependents – or a mortgage or other debts – then that amount may not be enough. Supplemental insurance may fill some or all of the gap – but how do you know? Read on. 

How much life insurance coverage you need

Life insurance professionals will commonly recommend having anywhere from 5x to 10x your salary in life insurance coverage. If you make $75,000 a year, that’s a death benefit between $375,000 and $750,000. Why such a range? There are many things to consider when determining how much life insurance you actually need. For example:

  • How much money would your family need — both short and long-term – if you passed away? What immediate expenses would they need to cover? And how much money would they need for the future?
  • If you have children who are still at home, how much will it take to raise them and send them to college?
  • If you have a spouse, do you want the death benefit to help cover his or her needs through retirement?
  • Do you have adults who are your dependents, such as a special needs child or a parent?
  • Do you have substantial co-signed debts, such as a mortgage or student loans?

If you have a family, it’s important to have the extra costs they will face in your absence covered, especially while your children are still at home. The more dependents you have – and the younger they are – the more life insurance you may need. There are a few general rules that can help you start figuring out your life insurance need:

  • Consider 10x your salary This is one of the simplest rules to follow, and it can provide a useful cushion for your family – but it doesn’t take all your actual expenses and needs into account.
  • Consider 10x your salary, plus college expenses If you add $100,000 - $150,000 for each child, that can help ensure they can achieve more of the opportunities you want for them. 
  • Consider using the DIME formula DIME stands for Debt, Income, Mortgage, and Education. Total your debts, mortgage, and college expenses, plus your salary for the number of years your family needs protection (e.g., until the children are out of the house), and that heps you determine your coverage need.
  • Human Life Value*
    Some financial representatives calculate the amount you need using the Human Life Value philosophy, which is your lifetime income potential: what you’re earning now, and what you expect to earn in the future.
    In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits.
    As with every individual, the amount of recommended insurance you purchase depends on many factors. A simple way to get that number, however, is to multiply your salary times 30 if you are between the ages of 18 and 40. The calculation changes based on your age group, so please refer to the chart:

Age

Maximum Life Insurance

18-40

30 times income

41-50

20 times income

51-60

15 times income

61-65

10 times income

66-70

1 times net worth

71-80

1/2 times net worth

81+

case by case

Any of those methods are a start, but there are more detailed online life insurance calculators that can help you arrive at a more accurate number, or you can speak with a financial professional. 

What to do if your employer doesn’t offer supplemental life insurance

Life insurance through work can be a valuable choice for all the reasons already noted: it’s easy to get, easy to pay for, and you’ll enjoy favorable group rates. However, many companies don’t offer life insurance benefits – and even if they do, the total coverage available (even with supplemental insurance) may not be enough for your needs. There are other things to consider: While group term life insurance up to $50,000 is generally income tax free to an employee, the imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and is subject to social security and Medicare taxes. Also, if you leave the company, you could lose your group life coverage if it’s not portable. Fortunately, there are many coverage options in addition to group life insurance plans through work.

    Term life insurance calculator

    Figure out how much you may need and what it could cost

    Consider getting private supplemental insurance as an individual 

    Term life insurance is very easy to shop for and get on your own. Many insurance companies, including Guardian, make it simple to compare rates by giving you an instant online term life quote.  Most of the quotes you’ll see are for level term life: these policies are typically offered with 10, 15, 20 or 30-year terms, and your premiums stay the same for the length of the policy. If you’re healthy, those premiums may not be much higher than with a group term life plan. And coverage isn’t dependent on your company or employment status – as long as you keep paying premiums, your policy will remain in force. 

    An individual policy also gives you many options, starting with the fact that you don’t have to get term coverage. You can opt for permanent (whole or universal) life insurance that builds cash value and becomes a life-long financial asset. No matter which type of policy you choose, many insurance companies will also let you tailor individual policies with riders (optional provisions) that can provide valuable added benefits.5 For example, many term life policies offer a convertibility rider that lets you change over to a permanent policy without getting a new medical exam. Permanent life policies can be even more customizable.

    If you do decide to get an individual policy, it makes sense to talk things over with an experience professional – like a Guardian representative – who can provide a more personalized assessment of your needs, and tell you about all your coverage options. And since you’ll have a choice of insurance companies, make sure to look for two things: 

    • Financial strength - You want to be confident that the company will be around when your family needs a payout years down the road. So, look for insurers with outstanding Financial Strength Ratings (FSRs), like Guardian. That includes a rating of at least “Superior” (A+) from A.M. Best (the insurance industry’s number one rating agency), a “Very Strong” (AA-) from Standard & Poor’s, or an “Excellent” (Aa1) from Moody’s.6
    • A company that underwrites its own policies - Some companies sell policies from another insurer. This can add costs to premiums, and an extra layer if you want to convert your policy to permanent coverage – or down the road when your family needs a payout.

    Frequently asked questions about supplemental life insurance

    Do you need supplemental life insurance?

    If you have little or no debt – and no one depends on you for financial support – then you may not need supplemental life insurance, especially if you have basic employer-paid coverage. However, if you have a family or people who depend on you for support – or you have debts that would fall on others if you passed away – then you should consider getting supplemental life insurance if it is available at work. 

    Is employer supplemental life insurance worth it?

    Supplemental life insurance from the workplace can be worthwhile. Company plans offer group life insurance rates that are typically more affordable than comparable individual policies. The group plans can be easy to get because they don’t usually require a medical exam, and you can pay for them with convenient payroll deductions. Accidental death and dismemberment coverage through the workplace can also be a valuable choice.

    What does supplemental life insurance cost?

    Supplemental employee life rates vary by the specific type of insurance coverage offered (e.g., term, permanent, or AD&D), your age, where you live, the size of the group, and your benefit amount. However, the cost of group life insurance purchased through your company will typically be lower than a supplemental insurance policy purchased as an individual. 

    Can I cash out my supplemental life insurance?

    Most employee supplemental life plans offer term coverage which does not build cash value and cannot be cashed out later on. However, some employers offer voluntary permanent supplemental life insurance which builds tax-deferred cash value that can be used for loans or cashed out – for example, to help supplement retirement income.

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    Disclaimer

    1 LIMRA; “2020 Insurance Barometer Study Reveals a Significant Decline in Life Insurance Ownership Over the Past Decade” https://www.limra.com/en/newsroom/news-releases/2020/2020-insurance-barometer-study-reveals-a-significant-decline-in-life-insurance-ownership-over-the-past-decade/

    2 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

    3 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

    4 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

    5 Riders may incur an additional cost or premium. Riders may not be available in all states.

    6 Ratings are as of 12/2020 and are subject to change. https://www.guardianlife.com/financial-highlights

    *The HLV Theory states that one should maintain life insurance equal to the present value of their expected future earnings. Life insurance companies place limits on life insurance available to consumers based upon this formula and have created age-based multiples of current income as a guideline. For example, a person in their 30s may be insured for around 30 times their annual income, 20 times for a person in their 40s and 10 times for people in their 50s. Age 60 and over about 1 times net worth.

    Financial information concerning Guardian as of December 31, 2020, on a statutory basis: Admitted Assets= $68.1 Billion; Liabilities = $60.3 Billion (including $48.9 Billion of Reserves); and Surplus = $7.8 Billion.

    Guardian Voluntary Permanent Life Insurance is underwritten by The Guardian Life Insurance Company of America, New York, NY.  Products are not available in all states.  Policy limitations and exclusions apply.   Optional riders and/or features may incur additional costs.  Plan documents are the final arbiter of coverage.  Policy Form # GP-1-GPL-14

    Guardian Group Life Insurance underwritten and issued by The Guardian Life Insurance Company of America, New  York,   NY.  Products are not available in all states.  Policy limitations and exclusions apply.  Optional riders and/or features may incur additional costs.  Plan documents are the final arbiter of coverage. Policy Form # GP-1-LIFE-15 Policy Form # GP-1-LIFE-12-NY (Group Term Life), GP-1-GPL14. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

    GUARDIAN® is a registered trademark of The Guardian Life Insurance Company of America, New York, NY. © 2021 Copyright The Guardian Life Insurance Company of America.

     

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