Supplemental life insurance provides an additional layer of coverage to an existing policy and is often obtained via the workplace. It could contain:
- Coverage purchased in addition to your normal group policy.
- Purchase life insurance for a spouse or child.
- Coverage that provides compensation if you are critically wounded or killed in an accident.
Supplemental life insurance, also known as voluntary life insurance, can be a valuable addition, but make careful to compare policies and rates with individual term life insurance available on the open market. In some situations, the premium for optional coverage may be higher than that of an insurance purchased on your own.
How does supplemental life insurance work?
If your employer provides supplemental life insurance, you can purchase it in addition to the standard coverage they give.
Basic life insurance policies are often paid for by your employer and cover one to two times your annual basic pay. Most employers do not provide coverage for commissions, bonuses, stock incentives, or other forms of compensation.
Supplemental life insurance products provide more coverage, but you normally pay the premiums.
In general, only full-time employees or those who work a certain amount of hours are eligible for supplemental life insurance. Furthermore, before you can be eligible for extra coverage, most firms need you to join in their basic life insurance plan.
Coverage amounts
Supplemental employee life insurance policies often provide more coverage than basic plans, subject to a maximum that varies by organization. Maximums are normally approximately $500,000, but can climb into the millions of dollars. Managers or high-level executives may have greater access to funds than lower-level employees. Supplemental coverage limitations for a spouse or child are typically lower than those given to employees, but each firm is unique.
Be aware that your group life insurance policy’s death benefit may be reduced when you reach a certain age, such as 60. If this happens, you will only pay a portion of the premiums to match the lesser life insurance death benefit.
Medical requirements
Basic group life plans are often guaranteed issues, 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
If you have $50,000 or less in group term life insurance, you are not subject to income tax under the Internal Revenue Code. Your employer will record any coverage that exceeds $50,000 as income. This sum may be subject to Social Security and Medicare taxes.
Types of supplemental life insurance
Here are the four major types of supplemental life insurance given by employers:
- Supplemental employee life insurance provides additional coverage to your policy.
- Voluntary spouse life insurance protects the life of your spouse. This type of policy will often provide coverage for a domestic partner as well.
- Supplemental child life insurance protects qualifying dependents.
- Supplemental accidental death and dismemberment insurance provides compensation if you die or are gravely damaged in an accident.
Do you need supplemental life insurance?
If you have group term life insurance via your workplace, it may not be sufficient to meet all of your requirements. If this is the case, you may want to consider getting more coverage. Here are some examples of how additional life insurance might help:
- Your basic life insurance policy is insufficient to assist individuals 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.
How much supplemental life insurance do you need?
To determine how much life insurance you need, begin with two questions:
- How much of your salary do others rely on?
- Is your current group life insurance policy sufficient to cover these expenses?
The amount you require, if any, is determined by the expenses your income covers. Here are a few circumstances that may require greater coverage:
- You have a child or care for an elderly parent, which increases the number of people who depend on your income.
- You purchase a home and require additional coverage for future mortgage payments.
- You get married and want to shield your spouse from any unexpected fees if you die.
- Your partner no longer works, so you are the family’s primary source of money.
- Your monthly expenses rise, and you require additional coverage.
- Your child begins college, and you require coverage for future expenses.
Buying life insurance outside work
The open market often provides a broader range of life insurance products than employment plans do. You can also purchase more coverage than with employer-sponsored policies.
Here are some samples of what a supplemental insurance policy could look like on the open market:
- Term or permanent life insurance that enhances your employer-provided basic coverage.
- Child life insurance for dependent children.
- Final expense life insurance covers burial or funeral expenses.
- Short- and long-term disability insurance.
- AD&D insurance is not limited to your workplace.
- Life insurance riders are extensions of an existing policy that provide additional coverage.
How much does supplemental life insurance cost?
Supplemental life insurance costs vary depending on where you work. This is due in part to the way insurers compute group life premiums. Insurance firms consider aggregate data, such as the number of employees and their average age. Because this data is unique to each organization, premiums might vary significantly. If you’re elderly or have a medical problem, this can benefit you. The group rate may be lower than if you purchased individual coverage. However, if you are young and healthy, the group rate may be more than what you would pay in the free market.
In general, rates for supplemental life insurance policies through work aren’t locked in, which means premiums can increase with age.
If you get ordinary term life insurance on the open market, your premiums are normally locked in for the lifetime of the policy, regardless of any health issues that may arise along the way. As a result, if you’re young, you could be better off purchasing life insurance from a private insurer and taking advantage of lower, guaranteed rates.
Key factors to consider before buying supplemental life insurance
Many companies in the United States provide extra life insurance to its employees. However, just because you can buy something does not always mean you should.
Where to buy: You may prefer the convenience of signing up through your employer and paying premiums directly from your paycheck. If you have an underlying health condition, it may be wise to take advantage of employer-provided supplemental coverage. On the other hand, if you’re young and healthy, you might be able to take advantage of your youth and get a lower-cost coverage yourself.
Alternative options: In addition to normal term insurance, some employers provide supplemental whole life insurance coverage. If you need more coverage, consider laddering your life insurance plans, which entails obtaining numerous term life policies of varying maturities rather than a single supplemental product. If you prefer certain features over greater coverage, you may be able to enhance your policy with riders such as accelerated death benefits, which allow you to receive a partial payout from your insurance if you become terminally ill.
Existing coverage: Before adding extra coverage, review your existing policy. Your basic policy may already contain AD&D, spouse, or dependent life insurance at no additional cost to you.
Portability: Although your employer normally pays for basic life insurance through work, if you leave, you may lose your coverage. Buying your own life insurance policy, or one that you can take with you, ensures that you are insured regardless of where your profession takes you.
