Life insurance provides income to your survivors in case you pass away. It could cover burial costs, help your spouse pay off the mortgage, or pay for your child’s college education. You can have multiple life insurance policies as long as you qualify for each one.

Employers, unions, and other membership organizations sometimes offer life insurance as a benefit. They may provide a small amount of coverage for free—along with the chance to buy extra, “supplemental” life insurance on top of that. Should you buy supplemental life insurance? Here’s what you need to know.

Basic vs. supplemental life insurance

There are typically two components to life insurance offered through your employer or organization. First, they offer a basic group insurance policy for free or a minimum premium. Basic insurance pays a death benefit that is typically capped at low amounts. For example, you might get coverage equal to one year’s salary.

Supplemental life insurance is the second part. You can opt to add to the death benefit you receive by paying an additional premium out of pocket. For instance, you could choose to pay for up to five times your salary in supplemental life insurance.

If your employer doesn’t offer both options, you can alternatively buy stand-alone individual life insurance and supplemental life insurance privately, through a life insurance company.

How does supplemental life insurance work?

With supplemental life insurance, the employer or association decides how much free coverage employees or members get, and how much more they can buy. The amounts are usually in multiples of salary.

Because it’s negotiated on a group level, supplemental life insurance typically (though not always) costs less than individual insurance. In most cases, you won’t have to take a medical exam or even answer health questions. However, you could lose your coverage if you leave your job. Unlike employer health insurance, which you can pay to extend through a program called COBRA, supplemental life insurance does not provide this option.

You can sign up for supplemental insurance during your annual benefits enrollment period (or when you experience a life event such as having a baby or getting married). And your premium payments typically come directly from your paycheck, which can take the sting out of the cost. If you should die while covered, your beneficiaries will receive the policy amount, just like with any life insurance.

Supplemental life insurance coverage options

Supplemental life insurance typically falls into one of three categories:

• Term. This is temporary life insurance that lasts for a stated period (e.g., 10 or 20 years). It's less expensive to buy, and the younger you are, the less it costs. But group term premiums typically rise over time because once the policy expires,  you’d need to renew (buy another policy) when you’re older—at a higher price—to continue coverage.
• Permanent. This coverage doesn’t expire—it continues as long as you keep paying your premiums. The most common permanent policies are whole and universal life. With whole life insurance, premium payments start out higher than term, but they don’t increase over time; with universal life, you can pay more or less depending on your budget (provided you cover a minimum amount that usually rises each year). Note that if you pay more early on, you can build the universal policy’s cash value—and use that value to cover the policy’s higher costs in the future.
  
• Spouse/child. Your plan may also allow you to buy coverage at the lower group rate for your spouse and/or children.
  

Your actual choices will depend on what your employer or organization selected. That includes whether the policy is term or permanent (and what type), how much coverage you can buy, and whether extra coverage requires a health questionnaire or exam.

Supplemental life insurance vs. AD&D

Supplemental life insurance pays a benefit for most causes of death. Accidental death and dismemberment (AD&D) provides coverage if you die or are seriously injured from a qualifying accident.

AD&D coverage might be a good choice if you have a specific concern about an injury or would like access to some life insurance prior to your death if you become disabled due to a covered accident.

There are different ways employers and organizations offer this coverage. Often, it’s through a “rider,” or add-on, to a basic group or supplemental life insurance policy.

It’s important to read the terms and conditions to understand the scope of coverage and whether it will address your specific needs. For instance, a loss of eyesight due to an accident might be covered. Loss of eyesight due to aging is not.

How much supplemental life insurance should you get?

Everyone’s life insurance needs are different. Your financial and family situation can help determine how much coverage you need. Factors to consider include:

• Dependents. Do you have or plan to have children? Do you live in a single-income household? How will your partner balance child care and work if you pass away? Are there other adults who may depend on you for their financial livelihood?
  
• Debt. This includes a mortgage, auto loan, student loan, or credit card debt. If you’re unsure if your family will be on the hook for your debt or harmed if it’s not honored, read the fine print.
• College expenses. Do you plan on paying for your children’s college expenses Open in new tab? The average annual cost of tuition alone in the United States is $9,678 for in-state and $27,091 for out-of-state students.
• Funeral costs. The median cost of a funeral is $8,300 Open in new tab. Do you want to fund this so loved ones don’t have to?

A life insurance calculator can help you identify your goals and find the right balance.

Compare that number to your benefits through your employer’s basic group policy, as well as any other life insurance you have in place. If you feel underinsured, adding coverage through supplemental life insurance might be a good option.

Is supplemental life insurance worth it?

Are you worried about leaving your family with a significant financial burden? Buying more life insurance could provide peace of mind, especially if you have a family history of medical issues.

If you have health problems, qualifying for affordable coverage can also be easier. For example, a group plan may allow you to buy up to $200,000 in coverage without health questions and require “medical underwriting” only for larger amounts.

On the other hand, your employer has control over what policies are available and how much you can buy. Plus, your policy might simply end if you leave your job.

That’s why supplemental life insurance works best as an addition to, not a replacement for, individual coverage. You can get extra insurance through a group plan—possibly at a discount—without having to worry about losing all your coverage if you leave the group.

You might want to use different kinds of policies for different needs. For example, consider earmarking individual insurance to cover critical expenses (like your mortgage or children’s college funds) and using supplemental coverage for “nice-to-haves” (like a future inheritance for your grandkids).

Author Details

Natalie Fidlow, CFA, is a chartered financial analyst and freelance financial writer based in Cranford, New Jersey. She writes about personal finance, financial services, insurance, and real estate.

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