What Is Supplemental Life Insurance and Is It Worth It?
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Supplemental life insurance adds an extra layer of coverage to an existing policy and is typically purchased through the workplace. It can include:
Coverage you purchase in addition to your basic group policy.
Life insurance for a spouse or child.
Coverage that pays out if you're seriously injured or killed in an accident.
Also known as voluntary life insurance, supplemental life insurance can be a useful add-on, but be sure to compare policies and prices with individual term life insurance from the open market. In some cases, this optional coverage may have a higher premium than a policy you can buy on your own.
» MORE: Do I need life insurance?
How does supplemental life insurance work?
If your employer offers supplemental life insurance, you can buy it in addition to the basic coverage your company provides.
Basic life insurance policies are typically paid for by your employer, and cover one or two times your annual base salary. Most employers don’t extend coverage to commissions, bonuses, stock incentives and other earnings.
Supplemental life insurance policies have higher coverage limits, but you typically pay the premiums.
In general, only full-time employees or those who work a minimum number of hours are eligible for supplemental life insurance policies. Plus, companies typically require you to enroll in the basic life insurance they offer before you’re eligible for supplemental coverage.
Group term policies through work are almost always conditional on your employment. Depending on the policy’s “portability,” you may be able to convert your group life insurance to a personal term life policy and take it with you if you leave your job. These policies typically have a fixed “maturity” or end date.
Coverage amounts
Supplemental employee life insurance policies typically offer more coverage than basic plans, up to a limit that varies by company. Maximums typically hover around $500,000 but can reach into the millions of dollars. In some cases, managers or high-level executives have access to higher amounts than rank-and-file employees. Supplemental coverage limits for a spouse or child are generally lower than what’s available to an employee, but every company is different.
Be aware that your group life insurance policy’s death benefit may automatically decrease when you reach a specific age, such as 60. If this occurs, you pay only a percentage of the premiums to match the lower life insurance death benefit.
Medical requirements
Basic group life plans are often guaranteed issue, which means you typically qualify for coverage regardless of your age or medical history. For supplemental policies, however, you may need to answer health questions or take a life insurance medical exam.
Taxes
Under the Internal Revenue Code, there are no income tax consequences if you have $50,000 or less in group term life insurance . Your employer will report any coverage over $50,000 as income. That amount may be subject to Social Security and Medicare taxes.
» MORE: Is life insurance taxable?
Types of supplemental life insurance
Here are the four main types of supplemental life insurance offered through employers:
Supplemental employee life insurance adds coverage to your policy.
Voluntary spouse life insurance covers the life of your spouse. In many cases, this type of policy will also cover a domestic partner.
Supplemental child life insurance covers eligible dependents.
Supplemental accidental death and dismemberment insurance pays out if you die or are seriously injured in an accident.
» MORE: Types of life insurance
Do you need supplemental life insurance?
If you have group term life insurance through your employer, it may not be enough to cover all of your needs. If this is the case, it may be worth getting additional coverage. Here are a few examples of when supplemental life insurance can come in handy:
Your basic life insurance policy isn’t enough to support those who rely on your income.
You want additional coverage for specific costs, such as burial fees.
You want additional coverage for another person not included in your basic plan, such as a spouse or child.
The workplace may not be the best place to get supplemental life insurance. You’ll likely have a wider choice of policy types and coverage amounts on the open market. Plus, individual policies aren't tied to your employment with a particular company. You may also be able to secure lower rates on the open market if you are young and healthy and choose coverage that has full medical underwriting.
» MORE: Compare life insurance quotes
How much supplemental life insurance do you need?
To decide how much life insurance you need, start with two questions:
How much of your income do others depend on?
Is your current group life insurance policy enough to cover those costs?
The amount you need, if any, depends on the costs your income covers. Here are a few scenarios that might call for more coverage:
You have a child or care for an aging parent, increasing the number of people reliant on your income.
You buy a house and need additional coverage for future mortgage payments.
You get married and want to protect your spouse from unforeseen costs if you die.
Your spouse is no longer earning an income, leaving you as the primary source of income for the family.
Your monthly expenses increase and you need additional coverage.
Your child starts college and you need coverage for future fees.
Use our life insurance calculator to find out how much coverage you need.
Buying life insurance outside work
The open market typically offers a greater choice of life insurance products than workplace plans do. You can also buy higher coverage amounts than with employer-based plans.
Here are a few examples of what a supplemental insurance policy might look like on the open market:
Term or permanent life insurance that supplements your basic policy from work.
Child life insurance for dependent children.
Final expense life insurance to cover burial or funeral costs.
Short- and long-term disability insurance.
AD&D insurance not tied to your workplace.
Life insurance riders that add specific coverage to an existing policy.
How much does supplemental life insurance cost?
The cost of supplemental life insurance depends on where you work. This is due in part to how insurers calculate group life prices. Insurance companies consider data about the group as a whole, such as the number of employees and their average age. This data is different for each company, so premiums can vary dramatically. This can work in your favor if you’re older or have a health condition. The group rate may be lower than if you buy your own coverage. However, if you’re young and healthy, the group rate may be more than what you would pay on the open market.
In general, rates for supplemental life insurance policies through work aren't locked in, which means premiums can increase with age.
If you buy standard term life insurance on the open market, the premiums are typically locked in for the duration of the policy, regardless of health conditions you might develop along the way. Therefore, if you’re younger, you might be better off buying life insurance through a private insurer and taking advantage of the lower, guaranteed rates.
In general, term life insurance is cheaper than permanent policies like whole life insurance and sufficient for most people.
Key factors to consider before buying supplemental life insurance
Many companies in the U.S. offer supplemental life insurance to their employees. But having the option to buy it doesn't always mean you should.
Where to buy: The ease of signing up through work and paying premiums out of your paycheck might be something you value. If you have an underlying health condition, it can be worthwhile to take advantage of supplemental coverage that’s guaranteed through work. On the flip side, if you’re young and healthy, you may be able to leverage your vitality and get a cheaper policy on your own.
Alternative options: Some employers offer supplemental whole life insurance policies in addition to the standard term options. If you’re looking for more substantial coverage, consider laddering your life insurance policies — buying multiple term life policies of different lengths — instead of purchasing one supplemental product. If you want specific features instead of more coverage, you may be able to upgrade your policy with riders, such as accelerated death benefits that let you take a partial payout from your policy if you become terminally ill.
Existing coverage: Review your existing policy before opting in to supplemental coverage. Your basic policy may already include AD&D, spouse or dependent life insurance at no cost to you.
Portability: Although basic life insurance through work is typically paid by your employer, you could lose your coverage if you leave your job. Purchasing your own life insurance policy, or one that allows you to take it with you, means you’re covered no matter where your career takes you.
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