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What Is Supplemental Life Insurance?

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Holly Johnson
Updated August 9, 2022
4 Min Read

Life insurance is an important component of any financial plan, and that's especially true for people who have kids or other dependents who rely on their income. With that being said, it's crucial to research the different types of life insurance before you settle on a policy, and to consider whether multiple policies might provide you with the best protection.

Supplemental life insurance is often available for individuals through their employers, but that doesn't mean it's the best option out there. If you're wondering what supplemental life insurance is and how it works, read on to learn more.

What is Supplemental Life Insurance?

While employers frequently offer life insurance as a perk of employment, supplemental life insurance offered through employers is a benefit workers are asked to pay for. With that in mind, a supplemental life insurance policy is typically paid for incrementally out of each of your paychecks. 

On the upside, this means you won't have to worry about writing checks or mailing your premiums in on time. With automatic deductions from payroll, your policy should remain intact as long as you don't opt out or cancel your plan.

With all this being said, it's important to know how supplemental life insurance offered through your job actually works. In some cases, supplemental coverage offered through work is nothing more than an accidental death and dismemberment policy (AD&D). This means your family will only be eligible to file a claim on your coverage if you die in accidental circumstances or you accidentally lose a limb, your hearing, or your eyesight in a covered event.

Other times, supplemental life insurance offered through work comes in the form of a burial insurance policy. This type of policy can be utilized to pay for final expenses and burial if you pass away, but the policy limits are normally very low — often with a death benefit of $20,000 or less.

While workers can purchase supplemental life insurance coverage for themselves, some employers make it possible to purchase coverage for a spouse and dependents. Also note that you can buy similar supplemental life insurance coverage from private insurers instead of relying on the coverage you're offered through work.

Basic vs. Supplemental Life Insurance

If your employer offers life insurance, they may offer basic group life insurance or supplemental coverage. Where you are asked to pay the premiums for supplemental coverage yourself, basic group life insurance is typically offered to workers for no additional cost. 

With that being said, basic group life insurance offered through employers is typically offered in low amounts that is insufficient for the average family. If you're offered life insurance at no cost through your work, you should consider it "extra" and buy additional coverage that is enough to provide for your family in the event of your untimely death.

Reasons to Buy Supplemental Life Insurance

While supplemental life insurance isn't always ideal, there are several reasons individuals wind up opting into this coverage and agreeing to pay for it via payroll deductions. Reasons to purchase supplemental life insurance include:

  • No medical exam required: When supplemental life insurance is offered through work, it's very likely anyone can get coverage without a medical exam. Even if the amount of coverage is insufficient for the average person's needs, any life insurance is better than nothing when you have medical conditions that prevent you from purchasing private coverage on the open market.
  • Buy additional coverage during your working years: Since supplemental life insurance is typically tied to employment, it can make sense for workers to purchase additional coverage while they're still in their working years. If supplemental coverage through work is affordable and broad enough to provide someone with extra protection and peace of mind, investing in a workplace policy can make sense.

Disadvantages of Supplemental Life Insurance

We already highlighted the fact that supplemental life insurance through work may come in the form of a burial policy or an AD&D policy, but there are other downsides to consider:

  • Lack of portability: The biggest downside of supplemental coverage is the fact it is typically offered through work. If you decide to retire or switch jobs for any reason, your supplemental coverage will end as a result. Since the average worker stays in a job for just 4.1 years on average per the U.S. Bureau of Labor Statistics, it's easy to see why you would want life insurance you can take with you.
  • Limited options: When a third party like an employer offers life insurance coverage, they aren't giving you the option to shop around for the best deal. You can either take or leave the coverage they offer, but you won't have the chance to tailor your policy and coverage to your needs. 

Does Supplemental Life Insurance Have Cash Value?

Generally speaking, supplemental life insurance comes in the form of burial insurance, AD&D insurance coverage or low limit term life insurance coverage. This means that, by and large, supplemental life insurance does not build cash value.

If you're looking for a type of life insurance that builds cash value you can borrow against later on, you should look into permanent life insurance products such as whole life insurance.

How Much Supplemental Life Insurance Can I Buy?

Supplemental life insurance offered through an employer varies widely, but it may be possible to buy life insurance with a death benefit up to $100,000, $250,000, or even more. The amount of coverage you're eligible for through work will vary depending on the plan and life insurance company your employer selects.

Coverage limits for dependents and a spouse are typically lower — as in, closer to $10,000 to $50,000 for a child and $100,000 or more for a spouse. 

Considering most experts suggest carrying life insurance with a death benefit of at least 10x your annual income, it's easy to see where supplemental life insurance may not be enough. 

Is Supplemental Life Insurance Worth It?

At the end of the day, buying supplemental life insurance through work only makes sense in a handful of scenarios. For example:

  • It makes sense to buy supplemental coverage through your employer if you have a medical condition that prevents you from buying your own coverage.
  • Your supplemental plan through work is offered for a good price considering the amount of coverage you're getting.
  • You're using workplace coverage to supplement a life insurance policy you already have.
  • You're using supplemental coverage for a specific purpose such as providing burial insurance or AD&D coverage.

If you don't fit within any of those categories and you are in good health, you're almost always better off buying life insurance from a private insurer. That way, you can select the death benefit and other details of your policy based on your needs. Not only that, but a policy you buy yourself will be fully portable, meaning you won't lose your coverage if you retire or switch jobs.

Supplemental life insurance can be "worth it" in a traditional sense, but usually only when you're using it in conjunction with other life insurance policies you have.