Does supplemental life insurance make sense for you?
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BLUEPRINT
Updated 8:46 a.m. UTC March 8, 2024
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Key points
- Supplemental life insurance is additional coverage offered through your employer, usually at a discount.
- Supplemental life insurance typically doesn’t have a cash value component and coverage is often lost when you leave an employer.
- If supplemental life insurance isn’t enough to protect your loved ones, it may make more sense to buy an individual life insurance policy on your own.
Many companies offer life insurance as part of their benefits package. That may be a nice perk — albeit one you hope to never need — but coverage is usually minimal. If something does happen to you, the life insurance payout from your employer-based policy may not be enough to cover your family’s financial needs.
Supplemental life insurance is one way to bridge the gap, but is it the right solution for your and your loved ones? We’ll break down how supplemental life insurance when you may (or may not) want to consider it.
Ethos
What is supplemental life insurance?
Supplemental life insurance, also known as voluntary life insurance, is additional coverage you can purchase on top of the group life insurance policy provided by your employer.
Six out of 10 U.S. employers with at least 50 employees say they offer group life insurance coverage, according to the 2023 Insurance Barometer Study by LIMRA and Life Happens. This common employer benefit usually includes basic coverage equal to one or two times the employee’s salary, though some plans offer a flat death benefit, such as $20,000.
That may not be enough to cover funeral costs or for your family to meet financial obligations, such as mortgage payments, car loans, tuition or everyday expenses. If that’s the case, supplemental life insurance represents one way to bridge the gap between your existing group life insurance policy coverage and your family’s financial needs.
Unlike the group life insurance policy, which is free for employees, the employee typically pays for supplemental life insurance. According to LIMRA, 38% of employees participate in a supplemental life insurance program.
How supplemental life insurance works
If you don’t feel your employer’s group life insurance provides adequate coverage, you may be able to purchase a supplemental life insurance policy through your employer.
Though plans vary, you can typically purchase supplemental coverage to:
- Extend your employee death benefits.
- Purchase additional coverage for your spouse or child.
- Secure death and dismemberment (AD&D) coverage.
Getting this supplemental life insurance — as opposed to buying an individual policy on your own — has some appeal. Because the employer buys the coverage for a large number of employees at once, you can usually opt into coverage for a lower premium, deducted right from your payroll, and often without a medical exam.
However, the coverage is typically not portable. If you leave the employer, you’ll need to get coverage on your own (or convert it to an individual policy, usually with a higher premium).
Plus, supplemental life insurance is typically term life insurance, meaning it does not have a cash value component. It’s not an investment vehicle, just an extra source of protection for your loved ones should you die while the policy is in force.
Pros and cons of supplemental life insurance
Supplemental life insurance offers several advantages to employees, but a few drawbacks could mean it’s not worth the investment for you. Here’s what you should consider before you opt in.
Pro: It’s affordable
Because employers purchase a policy to cover a large number of employees, supplemental life insurance is usually cheap. Think of it as buying in bulk.
“It is very inexpensive and can be deducted from payroll,” said Samantha Chow, Global Life Insurance, Annuities and Benefits Sector Leader at Capgemini. “It allows an individual who may not be in a financial position to purchase an individual product to gain coverage to support the basic needs of coverage for their surviving beneficiary.”
Sean O’Donnell, Senior Vice President, LIMRA, does point out, however, that it may not always be cheaper: “Group life rates can be lower than those for a comparable individual policy for certain individuals — especially those who are older or have health challenges. That said, younger, healthier individuals may get better rates with an individual policy.”
Pro: There’s likely no medical exam
If you have a medical issue that makes it hard to qualify for life insurance — or at least get it at an affordable rate — purchasing supplemental life insurance through your employer may be the way to go. Often, there’s no medical exam required.
Pro: You may be able to get coverage for your family
In some instances, your employer may allow you to purchase supplemental life insurance for yourself as well as your family. That means you can potentially purchase coverage for a spouse or children through your employer’s plan.
Con: It may not be portable
People don’t stay at jobs like they used to. According to 2022 data from the Bureau of Labor Statistics, wage and salary workers stay with an employer for just over four years (median).
Most of the time, policies are not portable, meaning you can’t continue to take advantage of the discounted coverage after you leave.
In some cases, you can convert your policy to an individual policy, but the premiums for the new policy will likely be significantly more expensive.
“Most carriers don’t have the capability to convert a group supplemental product into an individual product,” said Chow. “Thus, the policy ends when the employment ends.”
She added, “These products are basic term or non-cash-value-accumulating products. Therefore, investing in these products is not going to provide any savings benefits to the policyholder.”
Con: You might end up spending more on insurance later
If you avoid buying an individual life insurance policy for several years because you feel like your supplemental coverage is adequate, it may cost you in the long run. That’s because when it comes to individual policies, the average cost of life insurance rises as you age.
“If you start off at the age of 35, when you were quite healthy, and leave the employer at 45 and now have some health issues, getting a permanent product will become much more expensive,” said Chow. “Getting life insurance at a younger age, when you are healthier, is far less expensive and stays with you for life (as long as you pay the premiums).”
Con: You may be limited in your options
There are typically fewer opportunities to customize supplemental life insurance than there are with individual, privately-purchased life insurance products. Limitations can affect the type of policy you have access to as well as available policy add-ons, or riders.
“Supplemental life insurance is usually term,” said O’Donnell, so if you wanted a whole life insurance policy that accumulates cash value, you may want to purchase individual coverage.
In some cases, you may be able to add riders to a supplemental policy or potentially choose between term and permanent life insurance, but don’t count on it. If you’re looking for a customizable policy or something like a whole life insurance policy with an investable cash value component, it usually makes sense to purchase privately.
Con: It may not be enough
Even though supplemental life insurance policies often offer more coverage than group life insurance policies, it’s possible your employer’s supplemental life insurance policy still won’t meet your needs. If that’s the case, you’ll still need to consider purchasing a private policy.
O’Donnell said that “supplemental life is intended as additional life insurance … to supplement your existing life insurance coverage.” It’s not meant to replace life insurance wholesale for most people.
Alternatives to supplemental life insurance
Supplemental life insurance doesn’t make sense for everyone, and it may not even be available through your employer. Here are two alternatives to explore:
- Individual term or permanent life insurance. Rather than rely on a supplemental policy, work with an independent life insurance agent to find a policy that fits your needs.
You can shop for term life insurance, which allows you to lock in rates and coverage for a set period, such as 10, 20 or 30 years. These policies are typically much more affordable than permanent coverage and a good option if you want to cover your family for a specific period, such as until your children are grown or your mortgage is paid off.
If you want coverage that lasts a lifetime, consider a permanent policy, such as whole life insurance or universal life insurance. These policies often include a cash value, or an investment or savings component you can tap into while you’re alive.
- Riders. In some cases, you may be able to enhance the life insurance offered through your employer by adding on some riders, or optional policy provisions that customize coverage. For instance, you could get an accelerated death benefit rider so you could access the death benefit while still alive, allowing you to cover your medical costs as you get older. Not every employer’s life insurance provider will offer this level of customization, but it’s worth asking what your options are.
Do I need supplemental life insurance?
When you start a new job or open enrollment rolls around, you might discover that your employer offers supplemental life insurance. But how do you know if you need it?
Assess your financial needs
“Buying life insurance starts with a needs assessment,” said O’Donnell. “Consumers can find online tools or work with a financial professional to help them determine the amount they need based on their financial goals.”
Think about your family’s assets (savings, investments and other life insurance policies) and ongoing financial obligations (mortgage, other debts, children, etc.). If you pass away unexpectedly, will your family be able to continue to cover its expenses and live comfortably, based on your current assets and the death benefit from your employer’s group life insurance policy?
If not, supplemental life insurance may make sense.
“For a typical family … supplemental life insurance can be enough if the intention is just to cover the basics (mortgage, cars, school, debt, etc.),” said Chow.
Consider the type of life insurance available and your coverage goals
Chow cautioned that these policies typically don’t have a cash value component. “If someone is looking to purchase life insurance for the purpose of gaining cash value, they won’t get that here and will need to look at individual products.”
There are exceptions to every rule, however. “We are seeing a few carriers offer smaller supplemental products that are portable and do provide cash value,” said Chow. “These are much more expensive than the basic supplemental policies but do have the payroll deduction component, which helps make it look more appealing.”
Think about your professional path
It’s also a good idea to examine your expected professional path. If you’re the type of person who only stays in a position for a few years and then moves on, a supplemental life insurance policy may not be the best — especially if you can afford a private policy.
Because supplemental life insurance isn’t always portable or convertible, you may find yourself shopping for new coverage in a few years. As you age, it becomes more expensive to buy life insurance. The same is true if you have a negative change in your health status. Opting for a private policy early on may be cheaper in the long run because you can lock in a lower rate.
Evaluate your health
If you have a health condition that may make it difficult to qualify for an affordable private life insurance policy, a supplemental life insurance policy can provide some level of coverage. These policies typically don’t require medical exams, though you may have to answer some questions about your health.
Of course, even if you have a private policy, a supplemental life insurance policy can add another layer of financial protection at a relatively low cost. It also may be a good idea if you don’t have financial dependents but would like to provide a loved one with financial support should they inherit your debt or be faced with funeral or end-of-life expenses.
In the end, the answer depends on your budget, the cost of a supplemental policy through your employer, any existing life insurance policies you and your family already have and your overall coverage needs.
Supplemental life insurance FAQs
It can make sense to carry both supplemental life insurance and accidental death and dismemberment (AD&D) insurance. Weigh the pros and cons of carrying supplemental life insurance versus getting an individual life insurance policy before making a decision.
Just because you have traditional life insurance doesn’t mean you shouldn’t also consider getting AD&D insurance. Such policies can cover you if you are involved in an accident that results in the loss of a limb or serious trauma that prevents you from returning to work. Many employers offer this to their employees as part of their benefits package.
A single person without children is less likely to need supplemental life insurance, but there are times when it could make sense to purchase it (or to buy life insurance from a private carrier).
How much life insurance — and what type — you need comes down to your assets and the debt you’ll leave behind when you die.
“If [basic group life insurance] covers the debt that would be left behind to family members, then supplemental coverage may not be necessary,” said Chow. “Debt still gets left behind to someone, so making sure that someone can manage the debt becomes key.”
Also, remember that your needs may change. If you hope to one day have a spouse and children, it may be cheaper to purchase private coverage now.
“Nearly four in 10 (39%) insured consumers wish they had purchased their policies at a younger age,” said O’Donnell.
There is no standard pricing for supplemental life insurance. The cost comes down to the type of life insurance policy being offered and the discounted rate your employer has negotiated with the insurance company. Part of that rate will be determined by the demographic makeup of the employee base.
Supplemental life insurance is typically a term life policy, meaning it does not build cash value. However, in some instances, employers offer access to supplemental insurance with a cash value component, in which case you may be able to borrow against it.
If you’re truly interested in the cash value component of a life insurance policy, you’re likely to be better served by a privately purchased permanent life insurance policy, such as universal life insurance or whole life insurance.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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