What is Supplemental Life Insurance? A Closer Look at Added Coverage

What Is Supplemental Life Insurance? 

Supplemental life insurance is an additional policy that increases your employer-sponsored life insurance coverage. Employers commonly offer supplemental policies for an additional fee to help fill your current life insurance coverage gaps. Supplemental policies extend coverage and add extra protections through special riders and endorsements.

When Employer-Provided Life Insurance Is Not Enough — Purchasing Supplemental Life Insurance 

Life insurance aims to protect your family from any financial burdens that may arise in the event of your death. Employers typically offer basic life insurance policies that pay the employee’s beneficiaries if the employee dies during the policy term. Most employer-sponsored plans allow coverage of up to twice the employee’s annual salary.

A basic life insurance policy, even at the maximum value offered by your employer, may not provide sufficient coverage for your family in the event of your death. You may choose to explore the option to purchase a supplemental life insurance policy through your employer.

How Does Supplemental Life Insurance Work? 

Supplemental policies are most commonly purchased through an employer to enhance an employee’s group life insurance policy coverage. However, you can also purchase additional coverage for private life insurance. Adding a supplemental policy costs less than individual insurance and may not require you to answer health questions to enroll. 

Eligibility 

You must be a full-time employee with an existing, basic group life insurance policy to become eligible for a supplemental insurance policy. Most employers require a waiting period of 30-90 days from an employee’s start date for benefits to kick in. Employees can qualify for basic group life insurance coverage regardless of age or medical history. 

Purchasing supplemental life insurance, however, may require a medical exam. Employer-sponsored policies, like individual private plans, may require you to undergo a life insurance underwriting process to determine your coverage.

Coverage Amounts 

Compared to a basic group life insurance policy which might pay out a maximum of twice your annual salary, a supplemental life insurance policy could pay 7-to-10 times your salary amount. Insurers offer tiered coverage in $10,000 increments. 

This coverage does not typically decrease as you age. Active employees aged 65-69 are subject to dramatic, incremental decreases in coverage until their policy reaches a fraction of its original value by age 75.

Not all employer-sponsored policies are portable; however, some employers may allow you to continue paying for a supplemental policy if you leave your job. You may also opt to convert your supplemental life insurance policy to a permanent life policy, which may suit former employees with medical issues, as this process typically does not require underwriting. 

Types of Supplemental Life Insurance 

Insurers offer a variety of different types of supplemental life insurance policies depending on your individual coverage needs.

Supplemental Employee Life Insurance 

Employees can purchase supplemental life insurance to extend the benefits of their basic employer-sponsored policy. This type of supplemental insurance can increase the value of your policy up to 10x more than your annual salary and typically does not require a medical exam.

Supplemental Family Life Insurance 

This type of supplemental insurance policy allows an employee to add a spouse and/or dependents to their policy. Coverage may include funeral costs, burial or cremation services, and replacement income for the employee in the event of their spouse’s death or the death of their child. Policies may recognize domestic partners as spouses, depending on state laws. 

Supplemental Accidental Death and Dismemberment (AD&D) Insurance 

This policy type covers beneficiaries in the case of the employee’s accidental death or loss of a limb. Supplemental AD&D insurance is open to anyone but best suited to employees working with heavy machinery, volatile materials, or construction equipment. Most policies include specific regulations outlining what qualifies as an AD&D event to receive benefits.

Final Expense or Burial Insurance 

A final expense or burial insurance policy extends the coverage of an employee’s basic policy to include burial or cremation services and memorial or funeral costs. Since this add-on is intended specifically for final expenses, most supplemental policies involve strict guidelines about coverage inclusions.

Cost of Supplemental Life Insurance 

Many basic employer-sponsored life insurance plans are provided at no cost to employees. However, employees must pay out of pocket for a supplemental insurance policy. The cost of supplemental life insurance can vary by employer, age, and health status. While the cost varies by many factors, it’s usually reflected as a monthly fee per $10,000 of coverage. An example of this looks like the following:

Age	Monthly cost for non-smoker per $10,000 of coverage	Monthly cost for smoker per $10,000 of coverage
> 30	$0.20	$0.30
30-40	$0.35	$0.40
41-50	$0.60	$0.50
51-60	$2.00	$3.00
61-70	$7.00	$13.00

Insurers that offer group supplemental life insurance policies to employees must account for a wide range of ages to create an average group rate, which can benefit employees who are older or are experiencing an ongoing medical condition. 

How To Get Supplemental Life Insurance 

A person can choose to purchase a supplemental insurance policy through their employer or on their own in the open insurance market. Keep in mind, you can have both an employer-sponsored policy and a private life insurance policy. There is no legal limit to the amount of life insurance policies one person can buy, though the average policyholder may not be able to afford multiple plans.

Through Your Employer 

Purchasing a supplemental life insurance policy through your employer is a process similar to enrolling in an employer-sponsored basic life insurance plan. Most employers offer term life coverage, active for the duration of your employment, and allow employees to enroll in a supplemental insurance policy once annually during the open enrollment period. 

Once you have decided to purchase a supplemental insurance policy, complete the following steps:

1. Select your plan from the available options.
2. Choose a paycheck reduction system to pay your monthly premium. This functions like your existing employer-sponsored life insurance benefits, taking the cost out of your monthly gross pay instead of requiring a separate payment.  
3. Provide required information and fill out documents. Check to see if you need a medical exam before proceeding.
4. Designate beneficiaries.
5. Submit the application and await the confirmation of policy start date. 

Through a Private Policy 

You could also buy a supplemental insurance policy outside of your employer, potentially with a wider variety of options including term or whole life plans, end-of-life coverage only, or an AD&D rider. 

Complete the following steps:

1. Research and compare plans that suit your needs. You do not have to wait until open enrollment to buy a private plan.
2. Provide required information and fill out documents. Your insurer may require you to undergo a medical exam as part of the enrollment process. 
3. Designate beneficiaries.
4. Submit the application and await the confirmation of policy start date.

Once you discuss your options for coverage with your insurer and purchase a policy, your coverage is guaranteed for as long as you pay your premiums. Your policy is also portable and will not end if your employment is terminated.

Should You Get Supplemental Life Insurance? 

Policyholders can follow some simple steps to evaluate their finances and explore supplemental life insurance options should they decide to add more coverage. 

Consider How Much Life Insurance You Need 

By figuring out how much life insurance you need, you can determine whether your existing policy is enough or you need supplemental coverage to bridge the gap. The following calculation methods can help you decide if you need more benefits than your existing basic life insurance policy can provide.

10x Salary 

Experts suggest multiplying your annual salary by 10 to reach an optimal life insurance coverage amount. Generally, this calculation allows for coverage of final expenses and assumes the essential costs of living will remain relatively the same for your family to maintain during the decade following your death. 

Plus college expenses: The 10x salary rule does not include major long-term expenditures like a college education. Factor in college expenses per each of your children on top of regular costs of living, to financially protect their future.

DIME Formula

The DIME (debt, income, mortgage, education) formula is popular for helping people target the major expenses their family will need to be covered in the event of their death. This method considers expenses commonly faced by most policyholders, like student loans or credit card debts that are not forgiven automatically upon death.

In addition to debt, you should include your annual income for the years your family will require income replacement, add the remaining balance of your mortgage, and factor in college costs for each of your children to earn a degree. Remember that this formula can sometimes lead to over-insurance, as your family may ultimately access other resources, like college scholarships or loan forgiveness programs, to offset these benefits. 

Human Life Value 

The human life value (HLV) philosophy estimates the expenses your family would need to endure in the event of your death, in the present context. The following steps can help you calculate your HLV.

1. Determine current income: If you belong to a two-income household, you should calculate your net income for this step, not counting your spouse’s contributions. Consider what you bring home from your paycheck to use for expenses like electricity and groceries.
2. Subtract expenses: This step helps you account for expenses your family will need to continue in the event of your death, such as monthly utility payments, insurance premiums, and income tax payments. Experts suggest aiming to replace, after expenses, roughly 70% of your pre-death income.
3. Determine how long till you retire: You will need to consider your planned retirement age to determine how many years your family would require replacement income. In addition to considering the years until your retirement, you might also count the years until your dependents can support themselves and no longer require your life insurance benefits.
4. Adjust for future inflation: You can estimate the future inflation rate by consulting the Consumer Price Index, which reports an average long-term annual inflation rate of 3%. You might also include the discount rate, or the projected interest loan rate set by the Fed that will be in effect when your policy pays out. 

Consider the Advantages 

A supplemental insurance policy can increase your benefits exponentially. Consider the following advantages:

• Extended financial protection for your loved ones: Adding on to your existing basic life insurance can provide up to 10x your annual income, extending the financial protection of your loved ones in the event of your death. 
• Easy enrollment process: Enrolling through your employer or private insurer is fast and easy. 
• No medical exam: Employer-sponsored supplemental insurance policies typically do not require medical exams. 
• Group rates: You can take advantage of the affordable employee group rates regardless of your age or health status. 
• Expanded options through private insurance: Buying a supplemental insurance policy from a private insurer offers even broader plan options and allows enrollment at any time throughout the year.

Consider the Disadvantages 

There are disadvantages to consider, as well, including the following:

• Group rates: Young and relatively healthy employees seeking supplemental insurance may actually see group rates as a disadvantage since they would likely qualify for maximum benefits at a low rate through a private plan.
• Non-portable: Employer-sponsored plans may not be portable if the employee is terminated, which means you could potentially pay into a plan for years only to lose your benefits in the event of a layoff or firing. 
• Extra expenses: Many people cannot afford to pay out of pocket for a supplemental insurance policy, regardless of whether they seek coverage through their employer or on their own.

What This Means For You 

Taking the right steps to maximize your life insurance benefits is key. Many employers and private insurers offer supplemental insurance policies to enhance your existing benefits so you can rest assured your family is taken care of in the event of your death. You may be able to increase the value of your policy by up to 10x your annual income.

Ask your HR representative or financial planner about your options if you need more coverage than your existing policy can provide. You might start by calculating your desired total coverage amount, then explore your options for a term- or whole-life supplemental policy, rider, or endorsement through your employer or preferred private insurance carrier.