Life Insurance: When Is Extra Coverage Needed?

Life insurance is an important part of financial planning for the future, especially for those with families. While many employers offer life insurance as part of their benefits package, it may not always be enough to cover your loved ones' needs in the event of your death. This is where additional life insurance comes in. Also known as supplemental or voluntary life insurance, it provides an extra layer of protection on top of your existing coverage. This can be purchased through your employer or a private insurer, and there are several reasons why you may want to consider it.

When is it necessary?

There are several reasons why you may want to consider multiple life insurance policies to extend your coverage. Firstly, insurance coverage needs can change over time. For example, a couple with children may want to add more coverage to protect their loved ones. However, 20 years later, when the children are independent, the parents may opt for less life insurance coverage that will last longer or for the rest of their lives.

Secondly, one life insurance policy may not be enough. There are different types of life insurance policies with varying features. For instance, a term life policy does not allow the policyholder to withdraw cash value while they are still alive. If you need an additional source of funds, such as to buy a home or start a business, a whole life policy that allows you to access the cash value may be a better option.

Thirdly, you may want to supplement your permanent policy with a term policy. For example, you may want a permanent life insurance policy large enough to cover your spouse's needs in the event of your death. You can then add a term policy for extra coverage while your children are still young.

Fourthly, workplace life insurance coverage may need to be supplemented with other insurance to provide adequate ongoing protection. Workplace policies often have limited payouts that may not meet your family's needs. Adding another term policy can help make up the difference.

Fifthly, you may need more coverage for a limited amount of time, such as until your mortgage is paid off. In this case, you can take out another term policy for extra financial protection during this period.

Finally, term life policies have an expiration date, and it may be more cost-effective to get a new policy before the old one expires, as the rate will typically be higher if you renew when the term ends, especially if your health has deteriorated.

How much additional insurance is needed?

The amount of additional life insurance you need depends on your financial and family situation. Here are some factors to consider when determining how much additional coverage you require:

• Dependents: Consider whether you have or plan to have children, especially if you live in a single-income household. Think about how your partner would balance childcare and work if you were to pass away. Also, contemplate if there are other adults who depend on you for financial support.
• Debt: Evaluate your current and future debts, such as a mortgage, auto loan, student loan, or credit card debt. Determine if your family would be responsible for these debts if something happened to you.
• College expenses: If you plan to pay for your children's college education, factor in the cost of tuition and other related expenses.
• Funeral costs: The median cost of a funeral is $8,300. Decide if you want to cover this expense for your loved ones.
• Current and future financial obligations: Calculate your financial commitments, such as debt, everyday household expenses, and childcare.
• Liquid assets: Determine your liquid assets, such as savings and retirement accounts, and subtract them from your financial obligations to get an idea of the coverage amount you need.
• Length of coverage: Consider how long you need the additional coverage to last. For example, if you have a 20-year mortgage, you may want a 20-year term policy to ensure that your spouse can pay off the debt if you pass away. Similarly, if you plan to support your children for the next 18 years, you'll want a policy that lasts long enough to cover their expenses if you're no longer around.
• Unexpected life events: It's a good idea to build in a cushion for unexpected life events, such as refinancing a home or upgrading to a larger, more expensive home.

To make this process easier, you can use a life insurance calculator or consult a financial planner to help you decide on the appropriate amount of additional coverage.

What are the pros and cons?

Pros of Additional Life Insurance:

• It can help you secure enough coverage to meet the needs of your loved ones.
• It can fill gaps in your primary life insurance coverage.
• It can be cheaper than a single, larger policy.
• It can be added to an employer's basic group policy, which is often free or low-cost.
• It can be purchased without a medical exam or health questionnaire.
• It can be deducted from your paycheck, making it more affordable.
• It can be a good option if you have health problems, as it may be easier to qualify for.

Cons of Additional Life Insurance:

• It may not be portable, meaning you could lose coverage if you leave your job.
• It may have limited choices, such as no life insurance riders.
• It may require a health assessment, which can influence rates and eligibility.
• It can be more expensive than your original policy, especially if your health has deteriorated.
• It can be challenging to pay for multiple policies during financial hardship.
• You may be at risk of being over-insured, which can cause an unnecessary financial burden.

How to get it?

How to Get Additional Life Insurance

There are several ways to get additional life insurance coverage. Firstly, you can choose to purchase a new life insurance policy altogether. This option is suitable if you are unable to convert your existing term life insurance policy or if the premiums for doing so are too high. When applying for a new policy, you will undergo an underwriting process, which may include a medical exam, and you should be prepared to pay higher premiums, especially if your health has deteriorated or you are significantly older than when you first applied for life insurance. It is important to note that you should not cancel your current policy until the new one is active to avoid any gaps in coverage.

Another option is to convert your existing term life insurance policy to a whole life insurance policy. This option allows you to increase the term length of your coverage, ensuring it lasts for the rest of your life. Converting to a permanent policy can be beneficial if you are older, have experienced health issues, or have adult dependents who rely on you for coverage. However, the monthly premiums for a permanent life policy are typically higher. If you decide to convert your policy, it is recommended to do so at least six months before your current term length expires to avoid any coverage gaps.

Additionally, you can explore the option of purchasing supplemental life insurance, also known as voluntary life insurance. This type of coverage is often offered by employers as an add-on to the group life insurance policy they provide. Supplemental life insurance allows you to increase your total death benefit by paying an additional premium. However, it is important to consider that this type of coverage may not be portable, meaning it will not follow you if you change jobs.

Furthermore, you can choose to purchase multiple life insurance policies, even from different companies, to extend your coverage. This option can be beneficial if you require additional coverage for a specific period, such as until your mortgage is paid off, or if you want to tailor your coverage to fit your evolving financial needs. However, having multiple policies may result in higher premiums and can be financially burdensome, especially during times of financial hardship.

What are the alternatives?

There are several alternatives to purchasing additional life insurance. Here are some options to consider:

• Life insurance riders: Riders are add-ons to your existing life insurance policy that enhance or adjust the coverage. For example, a long-term care rider might allow you to access your death benefit early for care-related expenses, while a critical illness rider can provide access to the death benefit if you're diagnosed with a specific critical illness. These riders are versatile and can cater to various needs, but they usually come with a cost.
• Increase your current coverage: You can increase the death benefit of your current policy to get more coverage. This option often requires a review of your health and circumstances but can be more straightforward than buying a new policy. Contact your insurance provider to discuss this option and understand the process and associated costs.
• Ladder term life insurance policies: Laddering life insurance involves purchasing multiple term policies with varying durations and coverage amounts. As each term expires, your coverage decreases over time, matching your changing life insurance needs. This strategy can help you obtain cost-effective coverage without buying a single, large policy.
• Private life insurance: If you're considering employer-provided supplemental life insurance, purchasing a private life insurance policy may be a more flexible and affordable option. Private policies stay with you if you change employers or lose your job, whereas employer-provided coverage typically ends when you leave the company. Private insurers also typically offer cheaper coverage than supplemental policies through an employer. You can explore private term or permanent life policies, depending on your needs and preferences.
• Convert your term policy to a whole life policy: If you have a term life insurance policy, you may be able to convert it to a whole life policy to increase your coverage. Whole life policies provide coverage for your entire life and build up a cash value, but they tend to be more expensive than term policies.
• Purchase a new life insurance policy: If converting your existing policy is not feasible or cost-effective, you can consider buying a new life insurance policy to increase your overall coverage. This option will require you to go through the underwriting process again, which may include a medical exam. Remember not to cancel your current policy until the new one is active to ensure continuous coverage.

Frequently asked questions