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.

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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. Additionally, employer-sponsored life insurance usually doesn’t require a medical exam, so you can get coverage without being in excellent 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 considering 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.”

While employer-sponsored life insurance has a number of benefits, it also has several drawbacks. Here are some of the biggest advantages and disadvantages of this type of life insurance.

Benefits Drawbacks
Premiums are subsidized by the employer, so the cost of coverage is inexpensive (or free, in some cases) Group life insurance policies usually have low coverage limits, which may not offer enough protection for some people
Group life insurance policies typically don’t require a medical exam If you leave the company, you may not get to keep your policy
Employer-sponsored coverage is often guaranteed, so you can get approved regardless of your medical history Employer-sponsored policies often lack riders which can be used to personalize your coverage

Supplementing your company plan

If your standard employer-sponsored health insurance policy does not sufficiently meet your family’s financial needs, it’s a good idea to supplement with another plan. Here are a few things to consider when purchasing supplemental life insurance through your employer:

1. Consider your dependents’ expenses

The biggest reason to purchase life insurance is to financially support your loved ones. When thinking about how to supplement your employer-sponsored health plan, you should consider your dependents’ financial needs.

For example, if you have young children, you will want to factor in the cost of their education. But if your kids are grown and out of the house, you likely wouldn’t need to include that in your calculation. Also, consider your current savings. If your spouse could rely on your savings to continue living their current lifestyle, you might need to supplement with less coverage than if you had very little money saved.

2. Assess your coverage needs

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.

If you’re unsure how much supplemental insurance you need, you can find a life insurance professional and do a needs analysis. Alan Lavine, co-author of the book “Short and Simple Guide to Life Insurance” says that “typically, the insurance needs analysis results in people needing five to eight times their current wages in life insurance.”

3. Check what employer-sponsored options are available

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.

4. Consider the terms of the policy

When choosing a supplemental life insurance policy, it’s important to consider the terms of the plan. For example, you might be able to get a policy that is portable, which means you can take it with you if you change companies. This can offer some extra peace of mind, not to mention, you wouldn’t need to go through the process of changing insurers every time you get a new job.

As an alternative, you can also consider a convertible group term life insurance policy. With this option, you can usually convert your term policy into a permanent policy ahead of the initial term’s end date. This might be a good choice if you need a higher amount of coverage over a short period of time, like when you’re paying off a mortgage or sending your kids to college.

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 to eight times to reach a coverage level that works for their dependents. Keep in mind the financial obligations your dependents will be left with 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

    • 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.
    • 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.
    • 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.
    • 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.