What is supplemental life insurance?
Published 9:36 PM EDT, Thu March 7, 2024
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If your employer offers group life insurance as part of its benefits package, it may also offer optional programs where you can buy extra life insurance for yourself and your family (if applicable). This additional coverage is called supplemental life insurance or voluntary life insurance.
Buying supplemental coverage can be convenient and perhaps more affordable, but there are drawbacks compared to buying your own policy.
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What is supplemental life insurance?
“Supplemental life insurance is optional coverage that provides an extra layer of protection on top of the group policy your employer provides,” said Krisstin Petersmarck, a financial advisor with Bridgeriver Advisors in Michigan.
If employers provide life insurance to employees as an employee benefit, they usually provide a small amount for free or at a reduced cost. Then, with supplemental life insurance, or voluntary life insurance, you can buy additional coverage.
For example, your job may give employees two years of salary in group life insurance for free and then allow them to buy up to another eight years of salary through supplemental life insurance. If you earn $50,000, you get $100,000 of coverage for free with the option to buy up to another $400,000 yourself, creating a maximum possible death benefit of $500,000.
How does supplemental life insurance work?
How supplemental life insurance works depends on how your employer sets up the plan. Your employer decides how much coverage employees can get under the basic group plan and how much they can buy through the optional supplemental plan. Your employer also decides on the type of coverage, like if it’s offered as yearly renewable term life insurance or as permanent life insurance or if you can purchase coverage for your family members.
You usually sign up or change your supplemental life insurance during your annual open enrollment period for employee benefits. You might also be able to increase or change coverage after a major life event, like getting married or having a child. In most cases, you don’t need to take a medical exam to qualify. This can be a relief if you have preexisting health conditions.
Premiums are typically based on your age, the amount of coverage and the type of life insurance. Supplemental life insurance may be less expensive than buying your own individual policy as insurers often apply lower rates to group plans. You pay for the insurance premiums out of your paycheck.
If you quit or lose your job, you might lose your life insurance coverage as you’re no longer eligible for employee benefits; it depends on the plan details. Some group plans cancel the coverage as soon as you leave, while others offer portable life insurance, which allows you to keep your policy after leaving your job and pay for the full premiums yourself.
In some cases, you’ll fill out an application and provide information about your health to port your policy. You may also be able to convert your ported policy into permanent coverage, like whole life or universal life insurance.
How much does supplemental life insurance cost?
There’s no definitive answer to how much supplemental life insurance is because rates vary by employer. However, the good news is that supplemental life insurance isn’t that expensive.
Here’s an example of publicly available monthly supplemental life rates per $1,000 in coverage for Alameda County (California), Duke University and Lehigh University:
| Age range | Alameda County | Duke University (non-smoker) | Lehigh University |
|---|---|---|---|
Under 30
| $0.0150
| $0.0182
| $0.038
|
30-34
| $0.0180
| $0.0242
| $0.044
|
35-39
| $0.0245
| $0.0303
| $0.071
|
40-44
| $0.0350
| $0.0398
| $0.110
|
45-49
| $0.0585
| $0.0615
| $0.165
|
50-54
| $0.0935
| $0.0918
| $0.231
|
When you sign up for benefits with your employer, your company’s online portal or HR paperwork will tell you how much your supplemental coverage will cost per paycheck. You can also look at your paycheck to see how much your premiums are.
Pros and cons of supplemental life insurance
| Pros | Cons |
|---|---|
|
|
Supplemental life insurance coverage options
There are various supplemental life insurance coverage options, though what will be available depends on what your employer provides. You may be able to choose between the following:
- Term life insurance: This is coverage with a set expiration date and set premiums. For example, the term might last one year, five years or 20 years. If you renew after the policy expires, it will be more expensive as you’re renewing at an older age. “Supplemental life is usually annually increasing term insurance or five-year term that increases in cost every five years,” said Gordon Conwell, vice president at Pennsylvania-based Gordon E. Conwell Associates Inc.
- Permanent life insurance: Your plan may also offer permanent life insurance policies, like whole or universal life. “Permanent life insurance is a policy which offers lifetime coverage, guaranteed or adjustable premiums (depending on the type of policy) and a cash value component,” said Petersmarck. The funds in the cash value account can grow based on investment performance or a fixed interest rate, again depending on the policy type, and can be borrowed or withdrawn from while you’re still alive. “Premiums are typically higher than term insurance,” she added.
- Family coverage: Supplemental life insurance programs could also let you buy life insurance for your spouse and minor children.
What’s the difference between basic and supplemental employee life insurance?
Employers usually offer basic and supplemental life insurance when they provide employee (or group) life insurance. Employers pay most, if not all, of the cost of basic group life insurance. However, the coverage limits are low, usually one to two years of your salary.
Supplemental life insurance allows you to purchase additional coverage on top of your basic plan at a reduced group rate. Employers don’t typically pay for this benefit — the premiums are usually deducted from your paycheck. Supplemental life insurance may also offer more options. For example, you may be able to buy permanent life insurance, whereas the basic group life coverage may only be offered as a term policy.
How much supplemental life insurance do I need?
The amount of supplemental life insurance you need depends on your financial situation. “Need analysis shows most young people with children need life insurance equal to about seven to 10 times their annual income,” Conwell said.
In that case, the one to two years of salary provided by basic group life insurance would be insufficient, and you may want to consider purchasing additional coverage through the supplemental plan.
On the other hand, if you’re single with no dependents and no debt, you may have enough coverage through the basic group life plan and may not need to buy supplemental life insurance. However, you might still decide to buy additional coverage. For example, if your employer offers permanent supplemental options, you may choose to enroll in this benefit to take advantage of the cash value component.
What are the alternatives to supplemental life insurance?
The main alternative to supplemental life insurance is buying your own policy outside of work. With an individual policy, you can choose the type of policy and the amount of coverage. And since the policy isn’t connected to your work, it won’t end if you quit or leave your job.
However, you would likely need to take a medical exam or answer health questionnaires to buy your own life insurance policy. In addition, the premiums may be more expensive than the group rates at your job, although you can likely obtain larger coverage limits.
Although some supplemental life plans offer riders, like accidental death and dismemberment (AD&D) coverage, individual policies often have more options, such as accelerated death benefit, guaranteed insurability, convertibility and waiver of premium riders.
Conwell said to consider both supplemental life and the alternatives to make an informed decision. “Take all the basic group life your employer offers, but you may want to compare the benefits of individual life insurance over supplemental group life.”
Frequently asked questions (FAQs)
Supplemental insurance is worth it if you need extra life insurance coverage and your group plan charges a reasonable premium. Supplemental insurance is especially valuable if you have health issues and would struggle to qualify for your own individual policy.
One drawback is that your employer decides on the coverage options. There’s also a maximum limit to how much coverage you can buy under the group plan, which might be less than an individual policy. Finally, if you leave your job, you could lose the coverage as it’s an employee benefit and may not be portable.
You should get life insurance through work if your employer offers the type of coverage you want, if you have health issues and would struggle to qualify for an individual policy and if it’s offered at little or no cost. You should get life insurance from a private company if you want the flexibility of choosing your coverage and keeping it in force if you change jobs.
Since each approach has pros and cons, it may be worth getting some life insurance through work, such as the basic group coverage, and some coverage from a private company.
You can cash out supplemental life insurance if it’s a permanent policy since permanent policies build cash value. You can take out a loan against your cash value or make withdrawals from it while you’re alive. Most supplemental plans are term life insurance, which doesn’t build cash value and can’t be cashed out.
Editorial Disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airlines, hotel chain, or other commercial entity and have not been reviewed, approved or otherwise endorsed by any of such entities.
This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.
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