January 5, 2019

What is Supplemental Life Insurance

Read more about Life Insurance

Think of supplemental life insurance as a way to "supersize" your current life insurance policy.

Whether you have a life insurance policy through work or a private insurance company, you can get more coverage with supplemental life insurance at a reasonable price.

Remember:

Life Insurance + Supplemental Life Insurance = More Financial Security for Your Family

First, Some Life Insurance Basics

The basic role of life insurance is to provide for your loved ones after your death. How well a life insurance policy does that depends on the amount of coverage you have.

A $100,000 life insurance policy through a private insurer may range from around $20 to $50 a month, depending on your age and health. Employer-sponsored group rates are typically less.

As your family grows or life events occur, remember to update your life insurance policy so it provides for your loved ones when you're gone.

Supplemental life insurance enhances your existing life insurance policy with even more benefits. This is particularly useful if your company's life insurance coverage is not sufficient for your family or financial obligations.

The cost of supplemental life insurance through a private insurer ranges from about $18 to $29 a month, depending on the type of coverage. Again, employer-sponsored group rates for supplemental life coverage are usually cheaper.

Keep reading to learn the ways supplemental life insurance can benefit your loved ones.

How Supplemental Life Insurance Works

Supplemental life insurance works in tandem with your life insurance policy. Rather than a separate policy, it is a "rider," or supplement, to your life insurance policy.

In order to get supplemental life insurance, you must have a life insurance policy in force.

You can add a supplemental insurance rider at any time as your needs change. Some key advantages:

  • No evidence of insurability, such as a health screening or medical condition information, is required.

  • There's no need to go through the underwriting process.

  • The death benefit amount can be more than your life insurance policy's death benefit.

Insurance companies offer supplemental life insurance in two very different forms:

  1. Convertible Term Policy
    This is the most common form, with the supplemental insurance added to your base life insurance policy.

  2. Annual Renewal Term Life Policy
    A form of term life insurance that guarantees benefits for a set number of years.

Your premium may be lower than a convertible term policy to start with, but will get higher as you get older.

As with any type of life insurance, you select the amount of extra protection that you want. The cost of the coverage will be based on the amount of supplemental life insurance you select.

You also select your beneficiaries (i.e., those who will receive the money) and the frequency of premium payments.

The supplemental insurance portion pays beneficiaries a cash benefit upon your death, just like a life insurance policy.

Types of Supplemental Life Insurance

Supplemental life insurance can be purchased to cover specific situations. This is often the case with employer-sponsored policies, so it's important to know whether there are stipulations to the supplemental life insurance your employer provides.

Types of supplemental life coverage include:

  • Accidental Death and Dismemberment (AD&D) Insurance
    This pays out only if an accident occurs in which the employee dies, is paralyzed, or loses a limb, eyesight, or hearing.

  • Accidental Death and Personal Loss Insurance
    Depending on the benefit amount selected, this coverage pays your beneficiaries a monthly amount for a predetermined time if:

    • You are in a coma for more than 30 days after an accident.

    • You suffer paralysis.

    • You lose speech or hearing.

    Additional benefits may include loss of life due to exposure or a disability related to an accident, or presumed loss of life.

  • Health Specific Insurance
    This type of coverage pays a death benefit to your beneficiaries if you die from certain illnesses, such as heart disease, cancer, or other terminal disease.

    People often add these supplemental policies if such illnesses run in their family. They are used to pay for medical expenses so they do not deplete the benefits of the life insurance policy.

  • Mortgage Cancellation Insurance
    Also known as mortgage life insurance, this supplemental insurance pays off the remainder of your home mortgage upon your death. Otherwise, the insurance ends once your mortgage is paid.

  • Spouse or Domestic Partner Insurance
    This coverage allows a spouse or domestic partner to complement their life insurance policy by purchasing supplemental life insurance for their significant other.

  • Burial Insurance
    Pays for funeral and burial costs.

You can also buy supplemental life insurance to cover a specific expense upon your death, such as a large debt, certain creditors, your children's education, etc. This leaves more of the life insurance policy benefits to provide for your family's daily needs.

Employer-sponsored supplemental life insurance is only in effect for as long as you are employed with the company unless a portability option is available with your plan.

Do You Really Need the Extra Coverage?

That answer depends on your life situation. Some questions to consider when deciding whether to purchase supplemental life insurance are:

  • Are you single with people who depend on your income?

  • Are you married with big financial liabilities that your spouse will have to deal with when you're gone?

  • Do you have a family who will need to be provided for until they become adults?

  • Do you need more benefits than your current life insurance policy provides to replace your salary and your spouse's annual salary plus pay off your financial obligations and care for your family's daily needs?

  • Is it too expensive to purchase term or whole life insurance in the amount you need to ensure your family is financially secure?

  • Are you caring for a family member, which has added new expenses?

  • Is the coverage through your employer insufficient to keep up with your family's changing needs?

  • Are you planning a job change or retirement?

  • Are you worried that the amount of your life insurance policy is not keeping up with inflation?

If you answered "Yes" to any of these questions, then supplemental life insurance is worth considering.

Don't Forget About the "What Ifs"
Certain situations can cause a lapse in your existing life insurance policy, leaving your life- - and your family - uninsured. For example:

  • What if you leave your job (and the life insurance policy it provides) and something happens to you before you purchase a new policy?

  • What if your company goes out of business?

  • What if your health has declined since the time you first got life insurance through your employer and the time when you have to buy a life insurance policy on your own through a private insurance company?

A supplemental life insurance purchased through a private insurer would address these concerns.

How Much Supplemental Life Insurance Is Enough?

If you and/or your spouse have life insurance through your employers, chances are the policy does not provide enough insurance to care for your loved ones if one of you dies.

You may have a budget for your family's current needs. But it's hard to know how that might change in the future.

Complete a needs analysis to estimate how much supplemental life insurance may be required to enhance your existing life insurance policy.

  • Add up all the income you alone provide to the family.

  • Add up all the expenses your income alone pays for. Your list might look something like this:

    • Basic monthly bills: Food, clothes, utilities, household expenses, car payments, etc.

    • Living expenses: Mortgage or rent, insurance, medical co-pays, etc.

    • Education: After-school activities, tuition, books, fees, student loans, etc.

    • Debts: Credit card bills, car loans, school loans, etc.

    • Future expenses: College tuition costs for your children, medical bills, funeral and burial costs, expenses not covered under your life insurance policy or beyond the amount of your savings account or other investment and financial accounts

  • Add up the two numbers. This amount represents how much your family needs in order to remain financially secure after you're gone.

    Does your existing life insurance policy cover that amount? If not, this is the minimum amount of supplemental life insurance that you should buy to help cover expenses and your lost income.

Before making any decision about supplemental life insurance, do a needs analysis, consider other options, and shop around for the best coverage that meets your needs and budget.

If you already have supplemental life insurance through work, consider these three factors when deciding if you need more:

  • What type of policy you have
  • That policy's limits
  • How the death benefit is determined.

How to Buy Supplemental Life Insurance Coverage

You have three options for purchasing supplemental life insurance coverage. Each has pros and cons:

Purchasing Through Your Workplace Benefits:
In many workplaces, supplemental life insurance coverage is offered as part of a company's benefits package.

ProsCons
  • It's affordable.
  • The cost is deducted from your pay, making it easy to budget for.
  • You have to qualify for supplemental life insurance based on the company's medical underwriting guidelines.
  • Depending on your age, it could cost more than purchasing a supplemental policy on your own.
  • A one-type-fits-all supplemental insurance coverage may not suit your needs.

An Individual Policy Through a Private Insurer:
You can purchase an individual policy from the private insurance marketplace.

ProsCons
  • It remains with you throughout your life, regardless of whether you change jobs.
  • Since the premiums are over a long period of time, they are usually less than those of a workplace plan.
  • You can shop around to find the best supplemental life insurance coverage and price to meet your needs.
  • Choosing a provider can be overwhelming.

Combining Both Options:
Some people take advantage of their employer-sponsored supplemental life insurance options and buy through a private insurer.

ProsCons
  • You're not relying solely on your company's plan. As you age, both life insurance and supplemental life insurance cost more.
  • You don't have to worry about losing your supplemental life insurance if you change or lose your job.
  • You can add supplemental life insurance at any time to the life insurance policy through the private carrier without having to meet the medical guidelines.
  • The cost of having to pay for two life insurance policies and supplemental life insurance.

Bottom Line

Supplemental life insurance is about keeping your family financially secure when you're gone.

As a rider to your existing life insurance policy, it's flexible enough to add and update as life events occur. And, you can choose the type of supplemental insurance that best meets your needs.

If you're looking to boost your life insurance, supplemental life insurance may be worth considering.

Write to Maryellen Cicione at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.


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