Supplemental Life Insurance
B.A. Risk Management
Life Insurance Agent
Supplemental life insurance is coverage that you buy in addition to the life insurance coverage that you already have, in order to better meet your insurance needs.
It is designed to increase the scope of protection offered by your main policy and provide you with additional benefits. You can buy it through your employer or from a private insurance provider.
Who Needs Supplemental Life Insurance?
Supplemental life insurance is generally required in cases where the coverage offered by your employer – in the form of group life insurance – is insufficient to meet your life insurance needs.
A vast majority of employers in the country offer term life insurance coverage for their employees as part of their benefits package. In many cases, however, the coverage offered is not sufficient to meet the life insurance needs of individual employees.
Data from the Life Insurance and Market Research Association (LIMRA) shows that the life insurance coverage offered by employers in many cases is typically in the range of one or two times the annual salary of an employee.
For instance, if you make $60,000 a year, you might be offered an employer-sponsored plan worth $120,000. It might be sufficient for you if you happen to be single and if you do not have any dependents or financial obligations.
If, on the other hand, you have dependents (spouse, children, aged parents, or disabled siblings) or have major financial obligations (student loan co-signed by a family member, personal loan co-signed by a family member, or mortgage), you need a lot more than $120,000 to make sure that the financial needs of your dependents are taken care of in your absence.
In such a scenario, buying supplemental life insurance makes sense as it can enhance the extent of coverage offered by your employer-sponsored plan and ensure that your family’s financial interests are protected in your absence.
The Different Types of Supplemental Life Insurance
Given below are the most common types of supplemental insurance that you can buy to enhance the coverage offered by your group life plan.
Accidental Death and Dismemberment (AD&D) Insurance
It provides your beneficiaries with a sum of money under the following circumstances.
- If you die in an accident
- If you are paralyzed as a result of an accident
- If you lose a limb, eyesight, or hearing capacity as a result of an accident
AD&D insurance is mostly bought by people who work in an industrial setting and other such high-risk occupations, where the risk of occupational injuries is high.
Mortgage Life InsuranceMortgage life insurance pays off your mortgage in the event of your death. This is sometimes structured as a decreasing term policy, but a better choice is to get a regular term life policy to cover a mortage debt.
Spouse or Domestic Partner Life Insurance
It allows you to buy additional life insurance coverage for your spouse or domestic partner.
Final Expense Insurance
It provides your family with a sum of money to cover your burial expenses and other costs associated with your funeral service.
Buying Supplemental Life Insurance
When it comes to buying supplemental life insurance, you generally have two options – buying through your employer and buying an individual policy from a private life insurance company. Both options have their own benefits and drawbacks.
Buying Through Your EmployerBenefits
- You can buy the coverage you need with minimal paperwork, without filling out lengthy forms or undergoing medical exams.
- The absence of a medical exam means you can buy the coverage you need without worrying about your insurability.
- Generally, you are required to pay for the supplemental life coverage you buy. Many employers, however, tend to partially or fully subsidize the premium payments for their employees. So, you are likely to pay less for your supplemental coverage compared to what you might have paid for it if you had bought it from a private insurer.
- Any type of coverage that you buy through your employer – be it group life insurance or supplemental life insurance – is not portable. In other words, your coverage ends when you get a new job.
- Unlike an individual life insurance policy, a group supplemental life policy cannot be customized according to your specific needs.
Buying from a Private InsurerBenefits
- The supplemental life insurance coverage you buy from a private insurer is portable. So, even if you quit your job, you are still covered, which can give you a sense of security.
- The policy can be customized to a great extent. You get to choose the death benefit, policy term, and the add-ons you need.
- If you are healthy, you might be able to buy the supplemental coverage you need at very affordable rates.
- You might have to undergo a paramedical exam or at the very least fill out a questionnaire in order to qualify for a policy with most insurers, especially if you are looking to buy a substantial amount of coverage. If you have diabetes, high blood pressure, heart disease, or any other health problem that can increase your mortality risk, the cost of your coverage could go up significantly.
- Without an employer to subsidize your coverage, you will have to pay the premiums out of your own pocket.
Should You Buy Supplemental Life Insurance?
If the coverage offered by your employer is sufficient to meet your family’s financial needs in your absence, you might not need supplemental life insurance at all.
Generally speaking, your life insurance coverage should be at least ten times your annual salary. The coverage amount should be sufficient to pay off your debts (mortgage, credit card debt, and other kinds of debts) and to pay for your family’s short-term and long-term financial needs (replacing your income for a specific period of time and your children’s education).
If, on the other hand, the employer-sponsored coverage is insufficient, you should definitely consider buying additional coverage.
You can, as mentioned above, choose to buy it through your employer or from a private insurer, depending on your age and health condition.
Employer-Sponsored Policy vs. Individual Life Insurance Policy
If you are young and healthy, it makes very little sense for you to buy supplemental life insurance through your employer. Like we already mentioned, a medical exam is generally not required for a group life insurance plan.
As the insurer does not know anything about your health condition, they are unable to determine your insurability on an individual level. They usually try to mitigate their risk by charging a higher rate for all the employees covered under the group life insurance plan.
If you, on the other hand, apply for a policy with a private insurer, you will be charged based on your insurability and mortality risk as an individual.
If you manage to qualify for the ‘preferred plus or best’ rate class – which is entirely possible if you are in excellent health condition and do not have a history of health disorders – you can buy the amount of coverage you need at very low rates.
Now, let us consider a different scenario. You are in your 40s and you are diabetic. You started working for your employer at the age of 25, when you were single and in the shape of your life. So, you thought the coverage offered was more than sufficient to meet your life insurance needs.
It has been nearly two decades and now you realize that you need to increase your coverage, as your financial obligations have increased significantly. In this scenario, it makes sense for you to buy supplemental life insurance through your employer, as you do not have to go through an exam.
With a private insurer, you might be required to undergo an exam and you will almost certainly be charged a higher rate owing to your age and poor health.
What Does NoExam.com Recommend?
Buying supplemental life insurance is an individual decision, which you need to make after considering various factors – the coverage offered by your employer, your health condition, your life insurance needs, and the cost of buying additional coverage.
We at NoExam.com generally advise people to buy a term life policy from a private insurer, whether or not they are covered by an employer-sponsored plan. Even if your employer provides you with a substantial amount of coverage, it is not a prudent idea to depend on it alone, as it is not portable.
If you lose your job, you also lose your coverage in most cases. It is a risky way to live, especially if you have a family to take care of.
If you are a healthy 30-year old man who does not smoke, a 20-year, $500,000 policy is likely to cost you just under $25 a month.
It is less than what most people in the country pay for cable TV. So, the best way to safeguard your family’s long-term financial needs is to buy a term life policy when you are young and healthy, irrespective of the coverage offered by your employer.
If you have any questions with respect to supplemental life insurance or life insurance in general, our insurance experts at NoExam.com will be happy to answer you.