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Supplemental life insurance

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Life insurance protects your loved ones’ finances when you pass away, just like auto insurance protects your finances in the event of an accident. Many employers offer subsidized life insurance policies to their employees. The only problem is that these policies are relatively basic and aren’t tailored to the policyholder’s needs. Supplemental life insurance coverage, a type of optional life insurance coverage through your employer, can help you get the coverage you need while still allowing you to benefit from your employer-sponsored life insurance.

If you’re new to supplemental life insurance, don’t worry. Below, we explain what supplemental life insurance is, who might benefit from it and how to buy it.

What is supplemental life insurance?

Supplemental life insurance refers to any life insurance policy that you have in addition to your basic life insurance coverage. Most commonly, this is life insurance that is offered by the company where you work, on top of the free or low-cost group policy that many employers include as part of their benefits package.

A supplemental policy may come through your employer, but it doesn’t have to. And it may be worth considering depending on how much your employer’s policy offers to you and your family.

Supplemental life insurance is sometimes focused on a particular need. For example, some people will buy a supplemental policy to pay for funeral and burial costs so as not to leave a financial burden on their survivors. A policy such as this may be for anywhere from $5,000 to $25,000 or more.

If you are getting your supplemental policy through your work, it’s a good idea to sit down with your policy documents to see just how it is structured. Sometimes, a supplemental policy will only kick in once you’ve used the benefits from your other policies. There may be other restrictions as well.

How employer-sponsored plans work

Employers often offer group life insurance policies. Typically, these policies are free to the employee or heavily discounted. This means that the death benefits are also typically lower than you’d get with an individual policy.

Individual policies typically have you complete a health exam, but group policies do not. Instead, with most employer-sponsored plans, all employees are insured regardless of their current health.

If you’re lucky enough to have some free life insurance offered through your company or your spouse’s company, Bill Suneson, co-founder and president of Next Generation Insurance Group in Boston, suggests taking it. “Typically, employers offer (their employees) a term life policy,” he says. “The key advantage is that you don’t have to show proof of insurability.”

However, note that you may have to work for your employer for a few months before qualifying, and your coverage will typically end if you decide to leave your company. Employer-sponsored plans also present other issues, according to Suneson. Because these policies are created to cover a group, they have a one-size-fits-all mentality and may not include certain riders, such as long-term care or accelerated death benefits, that supplemental life insurance can provide.

Perhaps the biggest potential issue with an employee supplemental life insurance policy is that for employees with dependents, a company-sponsored policy is rarely enough coverage. For instance, if you make $70,000 annually as an accountant, and your employer offers free group life insurance equal to twice your annual salary, that may seem generous.

However, at second glance, you may realize that payout needs to cover a $220,000 mortgage on your home. If you have kids, you may have school fees and college tuition that needs to be paid in the coming years. If your spouse doesn’t work, you’ll need to cover basic month-to-month bills, from heating to cable. That group insurance will likely go fast. Depending on your family’s costs, you may feel more comfortable with a policy for $500,000 or more to cover your family’s needs in the foreseeable future if something should happen to you.

Supplementing your company plan

If the payout from your basic employer-sponsored plan won’t be enough to cover your dependents’ expenses for the next few years, you may want to consider purchasing supplemental insurance.

If you’re unsure how much supplemental insurance you need, you can “find an experienced person that deals with life insurance, and do a needs analysis,” says Alan Lavine, co-author of the book “Short and Simple Guide to Life Insurance.”

“Typically, the insurance needs analysis results in people needing five to eight times their current wages in life insurance,” Lavine says.

A thorough needs analysis should consider two vital factors: the total amount of your current debts, including your mortgage, car payments, student loans and credit card debt, as well as your share of future household expenses, such as the cost of your children’s future college tuition.

Once you’ve determined how much coverage you need, your next step should be to see what your company offers in the way of low-cost supplemental coverage. You can talk with your human resources representative about whether this coverage can be converted in the future. Some employers cancel your policy as soon as you leave the company, but some may allow you to take your policy with you.

Keep in mind that purchasing supplemental life insurance through your employer may limit your coverage choices. If you could benefit from niche coverage options such as coverage for long-term care or terminal illnesses, you likely won’t find that with your employer and may want to look at individual plans and riders. You may be able to purchase an individual plan that isn’t tied to your employment status and fits your needs and price point.

Types of supplemental life insurance available

Your employer likely offers a few different types of supplemental insurance. These options may include:

  • Supplemental employee life insurance: This type of coverage increases your coverage as an employee.
  • Supplemental family life insurance: Supplemental spouse life insurance provides a death benefit in the event that your spouse passes away. Supplemental child life insurance covers the death of your child or qualifying dependent.
  • Supplemental accidental death and dismemberment: If you die or lose a limb in a covered accident, this policy could pay out to your beneficiaries.

As you can see, supplemental coverage can be selected to fit your needs to an extent. If you want to cover situations beyond these, you may want to look into individual life insurance policies and riders.

Considerations to make when buying supplemental life insurance

If you decide you would like to purchase a supplemental life insurance policy, you’ll likely have to complete the process with your company’s human resources department.

To decide how much supplemental coverage you need, you may want to talk with a licensed insurance agent. It can be helpful to note that many people multiply their existing salary by five or seven times to reach a coverage level that works for their dependents. Keep in mind the items your dependents will have to pay for after your death. Do you have a mortgage? Do you plan on paying for college tuition? To reach a potential coverage amount, you can add up these costs and subtract a spouse’s salary or other assets.

Before purchasing supplemental life insurance, decide whether you want your policy to be tied to your employer. In many cases, your company will terminate your coverage if you decide to take another job. If you want coverage for specific situations, such as terminal illness coverage or long-term care coverage, you may want to consider purchasing an individual plan with a rider or two.

Frequently asked questions

Is employer supplemental life insurance worth it?

It can be, but you’ll want to weigh your options as far as whether to purchase it through your employer’s plan or not. You may have more flexibility elsewhere and can choose a policy that fits your particular circumstances by exploring what’s available from independent insurance companies. A financial consultant or insurance professional can help you weigh the pros and cons.

What does supplemental life insurance cost?

The cost of supplemental life insurance varies greatly depending on the claims payout amount, as well as whether you get a subsidized policy through your employer or another insurance company. Other factors that may play a role include your health, age and whether the policy is term or whole life.

What is the difference between supplemental life insurance and life insurance riders?

Supplemental life insurance is increased coverage for a group or employer-sponsored policy. Life insurance riders are additional coverage options that you can purchase in addition to an individual life insurance policy.

Does supplemental life insurance carry over?

Typically, your supplemental life insurance will end as soon as you leave your job. However, in some cases, your employer may allow your coverage to carry over — or “port” — for some time after. The best way to find out is to speak with your human resources department.

Written by
Lizzie Nealon
Insurance Writer
Lizzie Nealon is a former insurance writer for Bankrate. Her favorite part of the job is making home, auto and life insurance digestible for readers so they can prepare for the future.
Edited by
Insurance Editor