What is Supplemental Life Insurance and is it Worth the Cost?

Imagine you just landed a great new job. Youre really pumped for the first day of work. You put on your brand new suit, pick up your swanky briefcase, and head to the office...only to sit in onboarding meetings for the whole first day.

These meetings can be boring, and they can take forever if your new employer is large and onboards many employees at once. Typically, they go over things like employment expectations and requirements. But they’ll also usually walk you through the employer’s various benefits package options.

Many times, youre left with lots of choices at the end of onboarding, including:

• Which health insurance plan to choose.
• How much to contribute to your 401(k).
• Whether or not to use an FSA or HSA.
• Whether or not to purchase supplemental life insurance.

We’ve talked elsewhere on Dough Roller about the first three options. But now, let’s focus on the fourth option: Whether or not to purchase supplemental life insurance.

You might be thinking, What is supplemental life insurance? Were here with answers. First, let’s discuss what this type of insurance is, and then we’ll talk about whether or not it’s worth the cost.

What is Supplemental Life Insurance?

Supplemental life insurance is, as you might guess, a form of additional life insurance. It’s not meant to take the place of a good term life insurance policy. But it will give your family additional coverage should the worst happen to you.

You can get supplemental life insurance two ways: through your employer, or privately.

Employer-provided supplemental life insurance

Some employers offer both term life insurance coverage and supplemental life insurance. Term life insurance through your employer generally works like regular term life insurance. It may be cheaper, though, since it’s a group policy. The company takes on less risk when insuring a larger group of people, and this can translate into savings for you.

In 2014, about 94 percent of U.S. companies surveyed offered their employees life insurance coverage of some sort. Employers generally offer these ancillary benefits based on what their employees need most.

Supplemental life insurance is similar to a group term life insurance policy, but is typically more limited. The limits will depend on your particular policy. Here are some common terms to look for:

• Accidental Death and Dismemberment: Some supplemental policies are specifically for accidental death and dismemberment (AD&D). This means they will only cover you if your death is caused by an accident. Some of these policies, though, will also pay out if youre in a serious accident but don’t pass away. For instance, if you lose your eyesight, hearing, or a limb due to a covered accident.
• Burial Insurance: Some supplemental policies are strictly to cover the costs of burial and funeral services in the event of your untimely death. These policies typically offer between $5,000 and $10,000 of coverage.
• Non-Portable: Any life insurance policy you purchase through your employer may be non-portable. That means that you cant take it with you when you move on to a different employer or retire. We’ll talk more shortly about why this can be such a big problem for many consumers.
• Spouse or Domestic Partner Insurance: Sometimes employers will allow you to purchase supplemental life insurance for your spouse or domestic partner. This policy might complement your own term life insurance policy. The limits on policy amounts may be lower, and these policies may be subject to some of the same limits described above.

Your employer’s terms will vary, depending on the plan they’ve chosen. So you’ll want to examine the fine print for these limitations before you decide to purchase a policy.

Private supplemental life insurance

Just like you can get this type of insurance through your employer, you can also buy it on the private market. In this case, it’s like buying private term life insurance. You just shop around to see who offers you the best deal, and then purchase your insurance privately.

This type of insurance can have the first two limitations above. That is, you can purchase AD&D insurance or burial insurance on the private market. In fact, you may be able to buy these policies as a rider on your original term life insurance policy when your purchase term insurance.

The main advantage of private supplemental life insurance is that it is portable. Meaning, you will keep the coverage as long as you are paying the premiums. You can also purchase this insurance for your spouse or domestic partner in his or her own name.

In some cases, private supplemental insurance can also be cheaper. For instance, say youre really young and healthy. In this case, life insurance of any sort will be pretty cheap for you. So before you sign up for the employer’s coverage, you might check to see if you can get an individual policy more cheaply.

A note about portability

The non-portability of both term life insurance and supplemental life insurance through your employer can be a real bone of contention. In short, you shouldn’t depend on employer coverage alone for this reason.

Let’s say you start working with your employer straight out of college. Youre young and in great shape. But it’s still cheaper to purchase life insurance through your employer, so you get a $50,000 term life insurance policy plus a $10,000 burial policy.

Over ten years, you move up the ranks, so you stick with your employer for a while. In the meantime, you gain a little weight, become a little less active, and maybe develop a chronic or acute health condition. Then, you leave employment to start your own venture.

Now you realize youre stuck replacing your life insurance coverage on your own. And since you now have a house and a family, you likely need more coverage than you did ten years ago. Only now that youre older and less healthy, your term policy is significantly more expensive.

In this case, you may have been better off paying for your own term health insurance all along, knowing you wouldn’t be able to take your employer’s insurance with you.

If your employer offers incredibly cheap coverage, it’s fine to opt-in. Just know that you may also want to bulk up your private coverage so you aren’t stuck paying a lot more for the same coverage when you leave or change employment.

If you are ready to buy life insurance and want to get the best quote, Policygenius is the easy way to compare life insurance.

You can also purchase locally. Check out some of the largest and most trusted life insurance companies operating in your area.

Is Supplemental Life Insurance Worth The Cost?

Now that you know what supplemental life insurance is, you need to determine whether or not it’s worth the cost. This depends on a variety of factors, including how much insurance you already have, the limitations, and the costs.

Your current coverage

Buying life insurance should be a holistic experience. That is, you don’t want to look at all of your policies separately. You need to look at the policies as a whole, and total up your life insurance coverage.

It’s a good idea before you go to your enrollment meeting or shop for private supplemental life insurance to look at your current coverage. Determining exactly how much life insurance to get can be tough. One rule of thumb says to have ten times your annual salary in coverage. But that may be too much or not enough, depending on your circumstances. Read this article for a more thorough discussion of this issue.

If your current coverage is enough or even more than enough, paying more for supplemental life insurance may not make sense. You could, instead, put that premium amount towards saving for retirement or other financial goals.

Even if the premium is small, you shouldn’t pay for insurance you won’t need.

But if your current insurance isn’t quite enough, or if you’d be comfortable with more coverage, you might want supplemental life insurance.

This type of insurance can also be helpful for a couple of specific situations:

1. Faster payout for burial insurance. Your $500,000 term life insurance policy can take a few weeks to pay out to your family. In the meantime, if you passed away, they’d have to deal with your burial costs immediately. Some burial insurance has a built-in accelerator clause, so the funds would become available really quickly. That can give you extra peace of mind, even if youre comfortable with your current term policy.
2. AD&D pays out even if you don’t pass away. If your employer offers an Accidental Death and Dismemberment option, it can be worthwhile even if you have plenty of insurance. Be sure to read the fine print. But this type of policy could pay out even if you don’t pass away, which can make it very valuable. Of course, a long-term disability program could do the same thing. So balance the costs and benefits when deciding on your coverage.

What if you don’t have enough life insurance coverage? A supplemental insurance policy can help. But you shouldn’t rely on this policy too heavily, again, because of the portability issue. But you can go ahead and opt into this policy, and then shop around later for the proper amount of term life insurance coverage.

Policy limitations

It’s absolutely essential that you understand all of the policy’s limitations when looking at supplemental life insurance. This is true for any insurance policy, of course. But it could be even more crucial for this type of policy, which can have so many clauses and exceptions.

The bottom line is that the less likely you are to need insurance, the less you should pay for it. If your AD&D policy pays out in exactly two types of accidents that youre never likely to experience, it’s probably not worth the cost. But if the policy covers a broad variety of accidents and issues, it could be worth your while.

I’ll mention just one more time the portability issue, too. With any non-portable life insurance policy, be sure that you have a backup or at least a plan for ensuring youre covered properly if you move to new employment.

The cost

Before you sign up for any employer life insurance plans, shop around to see what you can get on your own. Again, if youre young and healthy, you may get better coverage at a lower cost than you’ll get through your group policy. This is somewhat unusual unless youre in excellent health, but it can happen.

Even if the private coverage you find is slightly more expensive, it can be worth a few extra bucks a month. You'll get portable coverage that you know will last for the entire life insurance term.

For older adults, or those who are less healthy, employer-based coverage is likely to be the cheapest option around. But, still, if a limited supplemental life insurance policy is pretty expensive, it may not be worth it. Just balance the monthly cost against your needs and the likelihood that you’ll use such a policy.

Remember, if this is an optional benefit through your employer, you’ll probably reduce your paycheck by the amount of the premium. So if it makes more sense to go with a private policy, you get money back in your paycheck to pay for the insurance on your own.

The Bottom Line

So now you know what supplemental life insurance is, but it’s still up to you to decide if it’s worth the cost. Just do your due diligence. Make sure you understand the policy youre being offered and its costs. Then, shop around to see if you can do better on the private market.

If youre exclusively shopping on the private market, consider adding supplemental insurance to your term life insurance policy. In some cases, you can add accelerated burial benefits or an AD&D rider to your existing policy, and this may be cheaper than purchasing it separately.

Either way, though, be sure you know how your supplemental life insurance policy fits into your overall life insurance picture and plan before you buy it.