What Is Supplemental Life Insurance and Is It Worth It?

If you work for a company that offers benefits, you may have heard of supplemental life insurance. It's for employees who need more life insurance coverage than the base policy provides. Here, we'll look at the meaning of supplemental life insurance and focus on the different types of supplemental life, as well as other options such as term life insurance.

What is supplemental life insurance?

Supplemental employee life insurance is extra coverage you can add to the life insurance provided by your employer. Companies often provide group term life insurance at little to no cost for employees, but you may find that the benefit is not enough to protect your loved ones in the event of your death. That's where supplemental life insurance comes in.

Supplemental life insurance comes in many shapes and sizes. Here are some of the most common types of supplemental life insurance:

Accidental Death and Dismemberment (AD&D)

An AD&D policy pays out if the insured dies in an accident, loses a limb, or loses a major function such as speech, sight, or hearing. If the insured dies, the beneficiary (or beneficiaries) typically receive a lump-sum payment. If the insured is injured, the amount the insurance pays depends on the type of injury. For example, the insured may receive 50% of the face amount of the insurance policy for loss of a hand or foot. They may receive 100% if they experience a greater loss, like losing an arm or losing sight. If the insured is paralyzed, they may receive 100% of the policy.

If the insured dies in an accident on public transportation, the insurance company may double or triple the amount of the base coverage.

AD&D covers only deaths and injuries due to accidents. For example, if the insured has a heart attack and dies, their beneficiaries do not receive an AD&D payout.

There are typically limits on how much supplemental life and AD&D coverage a person can buy, although the amount varies by insurance carrier.

Because AD&D coverage is limited to accidents, rates tend to be lower than the rate for a traditional term life insurance policy.

Supplemental spouse life insurance

Sometimes, an employer provides life insurance coverage for employees' spouses or domestic partners as an add-on to the employee's policy. Employees may also have the option of purchasing a supplemental policy for their spouse that provides greater coverage.

Supplemental child life insurance

Supplemental child life insurance provides basic life insurance coverage should an employee's child pass away. This coverage can be used for any purpose, including burial costs.

Supplemental burial insurance

Given that the average funeral costs average between $7,000 and $12,000 in the U.S., some people choose to purchase a supplemental insurance policy designed specifically to cover funeral-related expenses.

Is supplemental life insurance worth it?

There's no clear-cut answer, but supplemental life insurance coverage through an employer can be problematic. That's because a person is rarely sure how long they'll work for a specific employer, and most supplemental policies are not portable -- the employee cannot take the policy with them when they leave the company. If the employee wishes to maintain life insurance coverage, they'll need to shop for a new policy.

Supplemental insurance also tends to be more expensive than term life policies purchased in the open market. Plus, most insurance companies offer the same types of supplemental policies. Not only are the premiums likely to cost less, but they are portable.

How much supplemental life insurance should you buy?

This depends entirely on individual needs. If a worker is nearing retirement, has plenty of money saved and invested, and carries very little debt, there may be no need for a supplemental policy. However, if an employee is unsure how their family would pay for a funeral if they were to die, it may be worth it to price a supplemental burial policy. If the employee is on the road extensively or spends half their time flying coast to coast, it may be worth looking into a supplemental AD&D policy.

Supplemental life insurance through your employer

Before purchasing supplemental life insurance through an employer, it's essential to compare the premiums to those from insurance companies on the open market.

According to the Department of Labor Statistics, Americans change jobs about every four years on average. If an employee can't take a policy with them, optional life insurance and supplemental coverage has to get purchased all over again. And, because the policyholder is now older than when they purchased the first policy, a new policy will likely cost more.

However, that's not always the case. For example, an older worker with several health problems may find that a supplemental policy through an employer is less expensive, especially if there are questions regarding insurability. If that's the case, it's worth weighing the lower price of the employer-offered policy against the risk of leaving the policy behind if they leave the company.

Private supplemental life insurance

It is also possible to purchase supplemental life insurance from a private insurance company. Let's say someone is self-employed and has life insurance from a private company. They get married, have a child, and decide they need more coverage. They can purchase one or more supplemental policies.

Or perhaps a person was offered supplemental coverage through their employer, but shopped around, then added supplemental insurance from a private carrier instead. In many cases, policies purchased on the open market are less expensive than policies purchased through an employer.

How does supplemental life insurance work?

Supplemental life insurance works in much the same way as other types of insurance like auto, home, or health insurance. The policyholder pays a premium --- monthly, quarterly, or annually -- for coverage. When that person passes away, the insurance company writes a check to the beneficiary (or beneficiaries) equal to the coverage amount purchased.

How much does it cost for supplemental insurance?

Prices vary by employer and insurance company. Each organization evaluates factors like the life expectancy of the group they plan to cover, and estimate how much claims will cost.

While prices differ by organization, we wanted to get a rough idea of how much an employee can expect to pay for supplemental coverage through an employer. As a sample case, we looked at how much Alameda County, California government employees pay. This table shows the cost of a supplemental policy covering the employee and their spouse or domestic partner. Premiums are deducted from paychecks twice a month.

Here's how it works: Say a 45-year-old Alameda County employee wants a $100,000 supplemental policy. Based on this table, the company deducts $5.45 per paycheck (100 x 0.0545), or $10.90 per month.

Is supplemental life insurance portable?

Typically no, supplemental term life insurance is not portable -- an employee cannot take it with them when they leave an employer.

The ultimate goal for any employee is to purchase the best term life insurance for them, whether it's through their employer or on the open market. The same is true of supplemental policies. It's also important to compare term insurance to whole life insurance to learn if one type of coverage serves the policyholder better than the other.