What’s Supplemental Life Insurance? Do You Need It?

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The increased competition among just about every type of industry is leading employers to re-evaluate their employee benefit programs and bolster them with new benefits to help entice job-seekers to join their company.

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These employers are adding supplemental insurance to complement the standard offerings of group health, life, and disability insurance. Among the different types of supplemental insurance products, you’ll find one that is a bit confusing to many people - supplemental life insurance. 

Many employees already participate in their company’s group life insurance program, have an individual life insurance policy, or both. Is supplemental life insurance really necessary?

In this article, we’ll address that question for you and answer some questions you may have that will help you decide if you need a supplemental life policy. Let’s start with a brief overview of what exactly supplemental life insurance is.

What Is Supplemental Life Insurance?

Supplemental life insurance is a type of life insurance offered in addition to a group life insurance plan. It provides an extra layer of protection to the group life or individual life insurance you own. 

Sometimes called “voluntary life insurance” or “employee-paid life insurance,” insurers often will come directly to your workplace and conduct individual and/or group meetings to explain the benefits and costs of a supplemental life policy. 

Supplemental life insurance is often offered by an employer, but it also can be purchased individually on the open market, which can be advantageous in certain instances and will be discussed a little later.

If your supplemental life policy is tied to your employee benefits, you may be able to adjust your coverage during open enrollment, instead of having to deal directly with the insurance company. 

Supplemental life insurance offers more coverage than the basic group life plan does. For example, while the basic life plan typically provides you choices of a $50,000 employer-paid face amount (for which they pay the entire premium), 1x your base salary, or 2x your base salary, supplemental life policy’s face amounts typically range from $250,000 to $500,000, although some insurers will offer limits up to as much as $2 million for managers or high-level executives.


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What Are the Different Types of Supplemental Life Insurance?

When you enroll in your company’s benefits program, either initially or during the open enrollment period, you may find that your employer is also offering one or more types of supplemental life insurance. If you’re buying supplemental life on your own, you’ll also have an array of products to choose from. 

Let’s look first at the choices you may have where you’re employed.

Employer-sponsored supplemental life insurance

There are four main types of supplemental life insurance your employer may offer:

  1. Supplemental employee life insurance: This provides coverage in addition to the group life insurance benefit at work. Employees also often enroll in this program to supplement any individual life insurance they already own.
  2. Supplemental spouse life insurance: This coverage will provide a death benefit if your spouse or domestic partner passes away.
  3. Supplemental child life insurance: This covers your eligible dependents.
  4. Supplemental accidental death and dismemberment (AD&D) insurance: This provides a death benefit in addition to your basic policy if you die or are seriously injured as the result of an accident.

Your eligibility to buy supplemental life insurance for your spouse or children is often dependent on you first buying the base policy or a supplemental policy for yourself.

Individual supplemental life insurance

In addition to buying supplemental life insurance through work, you can also purchase it on your own.

Many employers offer individual supplemental insurance benefits, such as accident, cancer, critical illness, and life insurance through payroll deduction, though it’s not technically an employee benefit.

In this instance, an employer allows an insurance company representative to set up shop at their workplace and meet individually with employees, who are then able to buy individual supplemental policies, including life insurance. 

Premiums are deducted from each paycheck as a courtesy to the employee, or it may be set up so that the employee pays the insurance company directly.

If you aren’t offered individual supplemental life insurance at work, you can approach an insurer that sells supplemental policies directly on your own. You’ll find that most insurance companies sell these types of supplemental life insurance policies:

  1. Accidental death and dismemberment insurance (AD&D) 
  2. Supplemental spouse life insurance 
  3. Supplemental child life insurance 
  4. Joint life insurance
  5. Burial insurance 

What’s the Difference Between Traditional Life Insurance and Supplemental Life Insurance?

There are a couple of important differences between traditional life insurance and supplemental life insurance. 


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Cash value

One of the major differences between the two is the cash value aspect of each type of policy. Traditional life insurance (which we’ll define as non-term life insurance, such as whole life insurance or universal life insurance) has a component that acts much like a savings or investment account. A portion of each premium paid goes towards the cost of the life insurance’s death benefit, and a portion goes towards the cash value portion.

With a whole life insurance policy, the cash value portion grows when interest is credited to the account or dividends are paid by the insurer and applied to the cash value. Some types of traditional policies tie their cash value to the performance of mutual funds, such as variable life insurance and variable universal life insurance.

Unlike traditional life insurance, supplemental life insurance, which is usually term life, doesn’t accumulate cash value. Every dollar of premium paid is applied to the cost of the life insurance.

Riders

Another differentiator between the two types of policies is the number of riders that can be added to the policies. For example, when you purchase a traditional life insurance policy you can add additional riders that customize your policy, such as the disability waiver of premium rider or the long-term care insurance rider. Riders can not typically be added to supplemental policies.

How Much Does Supplemental Life Insurance Cost?

The cost of supplemental life insurance is based on several factors.

First, your age will determine your rate. For example, a 35-year-old at the ABC Company might pay $250 per year for a $500,000 supplemental life insurance policy, while a 60-year-old employee at the same company might pay $700 per year for the same amount of coverage.

The insurance company the employer selects is also an important determinant of the cost of a supplemental life policy. Every insurance company employs actuaries who analyze many variables to determine their rates, which will cause the rates to vary from insurer to insurer.

How Does It Work?

Supplemental life works the same as traditional life in many ways, except that premium payment is often made through payroll deduction and the employer pays the insurance company on behalf of the employee.

Like traditional life insurance, when you name a beneficiary for your supplemental life policy, if you die while the policy is in force, your beneficiary will be paid a tax-free death benefit that can be used in any manner they’d like. Once that death benefit is paid, the policy is no longer active and no future benefits will be paid.

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Who Typically Needs Supplemental Life Insurance?

For some people, a supplemental life insurance policy is all they can get at a certain point in their lives. For example, someone may not be healthy enough to be issued an individual life policy, but they are able to have their application approved by the life insurance company offering supplemental coverage.

Someone may also buy supplemental life insurance when they feel the amount of life insurance they currently own is inadequate and they need to add another policy to provide them with the amount of protection they’re looking for.

Who Typically Doesn’t Need Supplemental Life Insurance?

Just about everyone needs some type of life insurance to protect loved ones, but not everyone needs supplemental life insurance. 

A healthy 25-year-old employee will be able to purchase more term life insurance on their own for a lower premium than they could with supplemental insurance offered by their employer, or if they were to buy a supplemental life policy on their own.

For example, a 25-year-old female could purchase a $500,000 term life insurance policy on her own from some companies for $300 per year, but could be charged $375 for the same amount of coverage with a supplemental life policy.

Also, someone who has enough individually owned life insurance protection typically doesn’t need supplemental life insurance. 

You Can’t Take It With You

It should be noted that supplemental life insurance is most often not portable; meaning that if you leave your employer who sponsored your coverage, you won’t be able to bring it with you when you leave. 

This can be a problem if your health has worsened since you bought your supplemental life policy because you may no longer be insurable, or will have to pay a higher rate, when you try to purchase a standalone policy after you leave.

Whether you’re offered supplemental life insurance through your employer or you buy it on your own, be sure to take into consideration the financial health of the insurance company so you can feel confident they can pay any claims that arise.

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