What Is Supplemental Life Insurance? (2024)

Supplemental life insurance, also called voluntary life insurance, is a common perk in employee benefits packages. This type of group life insurance allows employees to supplement their other life insurance policies with extra coverage at the group rate.

For example, your employer may offer basic group life coverage for no cost, equal to one year’s salary. If they offer supplemental coverage, you can also purchase additional coverage at the group rate.

How Does Supplemental Life Insurance Work?

Supplemental life insurance is an extra policy designed to fill gaps in your primary life insurance coverage. It’s often offered by employers to enhance their basic group life insurance. Supplemental coverage is typically employee-paid, meaning you cover the premium costs.

In a typical supplemental life insurance policy, a single contract covers a group of people. Your employer owns the policy. If you pass away while covered by the workplace insurance, your beneficiaries will get a life insurance payout. The payout might be equal to one year’s salary or more, or a flat-dollar sum, depending on the employer’s policy. The premium is often paid through payroll deduction using pre-tax dollars.

The biggest downside to supplemental life insurance coverage is that it typically stops if you leave your employer. Because of this, consider exploring an individual life insurance policy that can stay with you no matter where your career takes you.

Supplemental Life Insurance Medical Requirements

Basic group life plans offered at no cost by your employer are usually guaranteed issue, and you can’t be turned down. Supplemental life policies, on the other hand, may require a life insurance medical exam or a health questionnaire.

Supplemental Life Insurance Coverage

Your employer will determine the coverage amounts offered. For example, some employers offer up to millions of dollars while others max out at a few hundred thousand dollars. Supplemental life insurance is often sold in $10,000 increments.

Types Of Supplemental Life Insurance

Depending on what your employer offers, you may come across these types of supplemental life insurance.

• Term life insurance: Term life insurance offers coverage with rates that last for a set period, typically ranging from one to 30 years. It’s straightforward: if you pass away during the term, your beneficiaries receive the death benefit. If the term expires and you’re still living, you may be able to renew the policy but at much higher rates. Most supplemental life insurance is term life insurance.
• Permanent life insurance: Although not as common, some group insurance plans may offer permanent life options, like whole life insurance or universal life insurance. These policies come with a cash value component. Cash value life insurance typically earns interest or other investment gains and grows tax-deferred. You can tap into a policy’s cash value while you’re still alive through a loan, withdrawal or if you surrender the policy.
• Coverage for your family: Some supplemental policies allow you to extend coverage to your spouse, domestic partner or child. But the death benefit for family members might be lower than yours.
• Burial insurance: Burial insurance is designed to cover end-of-life expenses and helps prevent medical bills or funeral costs from burdening your loved ones.
• Accidental death and dismemberment (AD&D): provides compensation if you’re severely injured or pass away.

Do You Need Supplemental Life Insurance?

Taking a look at your current coverage and future needs can help you decide if you need supplemental life insurance.

Start by asking: is your existing policy enough to support your loved ones if you die? If your current life insurance policy’s death benefit is only a fraction of your annual salary, it might fall short of covering daily living costs, debts and future expenses.

Next, consider your dependents: will they have enough to maintain their lifestyle without your income? If you’re planning for significant future expenses, like your child’s college tuition or paying off a mortgage, getting supplemental life coverage can be a lifesaver.

Lastly, assess the stability of your employment. If your job situation changes and you currently have employer-provided life insurance, it may lapse.

How Much Supplemental Life Insurance Should You Buy?

You will run across several different methods for calculating life insurance needs. But the most accurate way is to add up the financial obligations you want to cover, then subtract existing assets that can be used to meet those needs. The difference is your life insurance needs.

An easier way than calculating your needs manually is to use a life insurance calculator or consult with a financial planner who can help you decide how much life insurance you need.

Consider essential factors like:

• Current and potential future debts, including mortgages, car loans and credit cards.
• Anticipated education expenses for you or your dependents.
• Everyday living costs your loved ones will face in your absence.
• End-of-life expenses, which can often be unexpected and high.

How Much Does Supplemental Life Insurance Cost?

If you’re buying supplemental life insurance through your employer, the cost of supplemental life insurance is determined by your employer’s group rate. The life insurance company determines prices for each “group” by evaluating the demographics, life expectancy, past claims and policy design of each request. Pricing is essentially based on each group’s expected claims, expenses and profit margin.

One determiner of what you’ll pay that is within your control is the amount of coverage you choose; naturally, higher death benefits will carry larger premiums. Your age, health and lifestyle choices, like smoking, can also influence rates.

Another influencing factor is the type of policy. Term life insurance, which covers you for a set period like 20 years, is generally less expensive than permanent life insurance options.

How To Buy Supplemental Life Insurance Outside of Work

Since supplemental life insurance is often not portable and you can’t take it with you when you change jobs, buying coverage outside of work gives more flexibility. Buying supplemental life insurance outside of work puts you in control and gives you more options.

Here’s how to navigate the process:

1. Determine your needs: Understand the gaps in your current coverage and decide on the supplemental amount needed. Consider factors like your family’s needs and how much debt you have.
2. Shop around: Compare life insurance quotes from multiple companies. You’ll find a broader range of options outside of work, from term to permanent policies and special riders.
3. Review the details: Not all policies are created equal. Pay attention to coverage specifics, exclusions and any associated fees.
4. Understand the health assessment: Some insurers might require a medical exam or health questionnaire. This can influence your rates and eligibility.

Pros and Cons of Supplemental Life Insurance

Supplemental life insurance has benefits and drawbacks:

Pros

• Covers gaps in other insurance policies.
• Easy to get.
• Can sometimes add coverage for spouse and children.
• Employer-negotiated group rates might be lower than individual rates.
• Premiums can be deducted from paycheck for workplace plans.

Cons

• Possible health assessment requirements.
• Limited choices (like no life insurance riders) in workplace plans.
• Workplace plans may not be portable when leaving a job.

Alternatives to Supplemental Life Insurance

You have a few options if you don’t want to buy additional life insurance policies to supplement your existing coverage:

• Add an insurance rider to your current policy. Insurance 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. A critical illness rider can provide death benefit access if you’re diagnosed with a specific critical illness, such as cancer or a heart attack. These riders are versatile and can cater to various needs. But, like supplemental coverage, many life insurance riders have a cost.
• Increase your current coverage. Increasing your existing policy’s death benefit can give you more coverage. This often requires a review of your current health and circ*mstances but can be more straightforward than buying a new policy.
• Ladder term life insurance policies. Laddering life insurance involves purchasing multiple term policies with varying durations and coverage amounts. As each term expires, you’ll have reduced coverage that matches your decreasing life insurance needs over time. This can help you get cost-effective coverage without buying a single, larger policy.

Supplemental Life Insurance Frequently Asked Questions