If you’ve started a new job and signed up for the benefits offered by your employer, one of them could be “group life insurance”. You sort of know what it is, but the best thing about it is that it’s free to sign up for!
Then someone tells you about supplemental life insurance. Wait, what? Can’t group life insurance take care of everything without you needing a supplement for it? This feels like a sales gimmick, right?
We hear you, and luckily, we’re here to take you through the ins and outs of group and supplemental life insurance.
Let’s dive in!
What is Group Life Insurance?
Group life insurance is what you’d call a life insurance policy if you got it through your employer. This life insurance is bought by a company or organization (hence the name “group”) and then offered up to its employees.
If you’ve “opted in” for this life insurance at work, it usually won’t cost you anything (and you don’t need to have a medical exam for it either, which appeals to lots of folks.)
How much life insurance do you need? Find out with our free calculator!
That’s the good news. The not-so-good news is that your death benefit (the amount paid to your loved ones when you die) with basic group life insurance is pretty low. Why? These company group plans usually only cover a few times your salary at best, which is nowhere near what we say you should aim for. We recommend getting a plan that’s 10–12 times your annual income.
Let’s put it this way: If you’re earning $50,000 a year and you’re only covered for $100,000 when you die, that’s not enough to provide for your family for much time. Think about your lost income, mortgage repayments, education for the kids, and other big expenses!
Enter a slick insurance rep at work, eager to tell (and sell) you the supplemental life insurance you could do with.
What is Supplemental Life Insurance?
Supplemental life insurance is additional life insurance you can buy through your employer. Yep, you’ll have to pay for this one. It’s designed to strengthen and beef up the existing group life insurance that you have in place, by giving you more when it comes to death benefit.
This might sound worth it – but it’s not! You’ll pay more for this supplement alone compared to buying a life insurance plan outside of work. That’s because the insurance company doesn’t know a whole lot about you and your health, so they’re not going to promise you much when it comes to a payout.
And on top of that, the increase to your death benefit still won’t reach the levels you’d get with a plan outside of work (like the 10-12 times your income that Dave says you should aim for).
Also, how long do you think you’ll stay in your job? Because according to the Department of Labor Statistics, we change jobs every 4-5 years.(1) So, if you’ve taken out life insurance and supplemental policies at work, check to see if they’re portable. Meaning, can you take them with you if you get a new job? The bad news is, you usually can’t! Which means you’ll lose your coverage when you move jobs.
Should I Get Supplemental Life Insurance?
We do not recommend you get supplemental life insurance. You can go ahead and sign up for the basic (and free) group life insurance through your employer, but don’t shell out for supplemental life insurance.
Why? First up, it’s costing you money. And if you’re going to be spending money on life insurance, your best bet is buying term life insurance through an insurance agent outside of work! You’ll be paying less in premiums that way, compared to the supplement through your employer.
Not only will this “private” term life insurance give you more of a death benefit, but it’ll also stay with you through whatever job you’re doing.
And don’t forget to get some long-term disability insurance too (more on this soon) which will cover lost income if you become injured or disabled and can’t work.
Do I Need Any Life Insurance Riders?
Once you’ve signed up for group life insurance at work, the insurance rep might try to sell you these “riders” to your life insurance too. Spoiler alert – you don’t need any of these either!
AD&D: Accidental Death and Dismemberment
This accidental death and dismemberment (or AD&D) policy covers you if you lose a limb (the “dismemberment” part) or die “accidentally” (which the last time we checked, was the same as dying in the regular sense of the word!)
If you already have a life insurance policy that covers accidental death, death by disease, death by chocolate, whatever kind of death you can come up with, why would you need additional coverage for an “accidental” death?
Hint: You don’t. Not only are these policies cheap, they’re also worthless because of the long list of conditions the insurance company says it won’t payout for. Buyer beware: The devil is in the details, and AD&D policies are chock-full of those details!
And don’t be fooled into AD&D even if the insurance rep says you’re covered if you don’t die but just lose a limb or something. If you have long-term disability insurance in place—and we hope you do because it’s just as important as getting term life insurance—you’d be covered for income lost because of an injury or disability anyway.
How much long-term disability insurance do you need? We say get as much coverage as you can—around 60–70% of your income. Because this is the amount of your salary you bring home on a normal day (once you’ve accounted for taxes, social security and other things that come out of your paycheck.)
Supplemental Spouse or Domestic Partner Life Insurance
Okay, here’s where an insurance rider might start to play on your heartstrings. A lot of employers offer life insurance for your spouse or domestic partner if they’re not already covered by any type of life insurance.
Sounds sweet and thoughtful, right? While it might sound easy to sign them up at the same time as you, there’s a catch! Because it’s a policy that rides along with your group life insurance, the payout is almost never going to be high enough to replace their income. Even if they’re a stay-at-home parent, it wouldn’t be enough.
Think about how much daycare and transportation costs would be if your other half wasn’t there to do it! Your best bet is to buy them a decent term life policy instead, outside of work.
Burial or Final Expense Insurance
If thinking about your loved ones when trying to make a decision about life insurance didn’t make you emotional, thinking of them being grief-stricken while planning your funeral certainly will. But don’t let your emotions overrule your actions!
Burial insurance is another policy you can do without. It’s designed to pay for your final expenses when you die, and it’s usually aimed at older people who want to take away the stress of funeral expenses from their family. But here’s the thing about dying: Eventually everyone does. So as far as finances go, it should be easy to plan for.
The average funeral costs $8,500.(2) But instead of paying a monthly payment for a burial insurance policy to cover that cost, you could save, say, $50 every month and invest it somewhere (like a mutual fund) that earns you an average of a 10–12% return per year.
By the time you reached 78, you would have built up almost $53,000! That’s enough for a funeral worthy of a celebrity!
The truth is, a good emergency fund and the right amount of term life insurance should cover the cost of death and funeral expenses, hands down. So there’s no reason to bother with a separate policy!
The Types of Life Insurance You Actually Need
Life insurance is there to provide for your loved ones when you die. It’s a big job, but a good term life insurance plan is more than up to the challenge! We recommend buying term life insurance that’s 15–20 years in length and covers 10–12 times your income.
And in addition to term life insurance, you should always have some long-term disability insurance in place. Term life and long-term disability insurance go hand in hand in giving you and your family the protection you need.
To speak with a qualified, friendly insurance professional, look no further than our friends at Zander Insurance, one of our oldest partners. They’re trustworthy experts who won’t overload you with a bunch of supplements you don’t need. Reach out to them today to see how you can safeguard your family’s financial peace.