What Is Supplemental Life Insurance?

Purchasing life insurance is an effective way to protect your family from financial distress when you pass away. However, the wide range of options available makes choosing the right policy confusing.
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What Is Supplemental Life Insurance?

Written by Brian Greenberg
CEO / Founder & Licensed Insurance Agent

Last updated: November 25th, 2022

Reviewed by Paige Geisler
Licensed Insurance Agent

If your employer offers supplemental life insurance, it’s essential to understand how this policy works to determine if it’s right for you.

What Is Supplemental Life Insurance?

Supplemental life insurance is additional life insurance purchased to increase coverage provided by an employer or organization, such as a union or membership society.

For example, your employer may offer free basic life insurance as part of your employee benefits package. Basic life insurance policies typically have low coverage limits, meaning the death benefit may not be high enough to meet your family’s needs when you pass away. Many people purchase additional coverage to supplement their plan, hence the name “supplemental life insurance.”

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How Does Supplemental Life Insurance Work?

Employers usually determine how much basic life insurance to provide and how much supplemental insurance you can buy based on your salary. For example, your employer could offer free basic coverage worth twice your yearly salary and allow you to purchase supplemental life insurance worth up to ten times your annual salary.

Premiums for supplemental life insurance are often deducted automatically from your paycheck. This simplifies the process of purchasing additional coverage. It also makes it easier to manage your policy and keep your premium payments up to date.

Similar to classic life insurance policies, supplemental life insurance pays a death benefit to your named beneficiaries when you die. How your policy works depends on the type of insurance your employer provides. Common types of supplemental life insurance include:

  • Term: Term life insurance is generally the most affordable type of supplemental life insurance. These policies typically last between 10 and 30 years. The plan then expires after the term has ended. Term life insurance policies come with level premiums. This means your provider can’t increase how much you pay per month or year. They also offer level death benefits, guaranteeing your beneficiaries a pre-agreed amount if you die during the policy’s term with the coverage in force.
  • Permanent: Unlike term life insurance policies, permanent policies provide lifelong coverage. Your beneficiaries will receive a death benefit, providing you keep paying your premiums, regardless of your age or elapsed time. Some permanent policies offer level premiums, while others gradually increase your premiums at certain intervals. Permanent life insurance is more expensive than term coverage, but it can build cash value by receiving dividends. These dividends can then be used to increase the final death benefit of your permanent policy or be withdrawn periodically to be spent at your own discretion.
  • Spouse/child: Some organizations offer supplemental life insurance policies for the children and spouses of employees.

What Does Supplemental Life Insurance Cover?

The primary purpose of supplemental life insurance is to cover your beneficiaries’ financial needs when you pass away. Your beneficiaries are the people you choose to receive the death benefit. Most supplemental life insurance plans don’t restrict how beneficiaries can spend the death benefit, allowing them to use it to pay off an outstanding mortgage, settle debts, or for any other purpose.

However, some supplemental life insurance plans provide coverage for specific instances. For example, some plans may cover end-of-life costs, such as funeral expenses and a burial or cremation, and some policies will only pay out if you pass away from an accident while on the job. It’s worth asking your HR representative to explain precisely what your policy covers — and what it doesn’t — before committing to a supplemental life insurance plan.

What Are the Benefits of Supplemental Life Insurance?

One of the primary benefits of purchasing supplemental life insurance through your employer is that it’s often cheaper than purchasing a policy from a company on an individual basis. However, this isn’t guaranteed, and you may find private insurers offering comparable products for less. You can use a comparison website to help you weigh your options.

Many supplemental life insurance policies purchased through an employer or an organization’s benefits package don’t require a medical exam or health questionnaire. This could be particularly advantageous when you have a preexisting health condition that makes it challenging to qualify for private life insurance. However, providers may restrict the coverage amount available without medical underwriting.

What Are the Drawbacks of Supplemental Life Insurance?

Supplemental life insurance policies are less flexible than private plans because your employer’s decisions limit your coverage options. You can’t customize your plan to suit your family’s financial circumstances. It’s essential to consider whether the supplemental life insurance plan being offered is adequate to support your beneficiaries before signing up.

Unlike basic employer-provided life insurance, supplemental life insurance isn’t always portable. This means you may lose your coverage if you leave your job. Life insurance gets costlier with age, so obtaining the same level of coverage will be significantly more expensive when you leave your position years later.

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How Do You Get Supplemental Life Insurance?

You can sign up for supplemental life insurance when you begin working for a company that offers life insurance as a benefit or join a participating organization. Alternatively, you can purchase your policy during the annual benefits enrollment period. Most providers also allow you to buy coverage when you experience significant life changes, such as having children or getting married.

Key Takeaways About Supplemental Life Insurance

  • Supplemental life insurance boosts the coverage provided by basic employer or organization-sponsored life insurance.
  • These policies can ensure your beneficiaries’ financial security when you pass away by paying a guaranteed death benefit.
  • Supplemental life insurance is often cheaper than products purchased through private companies.
  • You may not need to undergo a medical exam or health questionnaire to obtain supplemental life insurance.
  • Consider your family’s financial circumstances when deciding whether to purchase supplemental life insurance. A private policy may suit your needs better.

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