Skip to main content

What is Supplemental Life Insurance and Do You Need It?

Published March 16, 2021

5 minute read

David Ning

By David Ning

One of the benefits I never had while working a 9-to-5 was a group life insurance policy offered by my employer. That’s mostly due to never really working for large corporation where they are common. However, I remember being disappointed that my former employer didn’t offer such a benefit. These group insurance policies are usually much cheaper for the employees. In fact, some companies even offer the benefit to their workers for free. The only downside to group policies is that coverage is usually low. That means those who want more robust life insurance coverage often have to look elsewhere. That’s where supplemental life insurance comes in.

What is Supplemental Life Insurance?

Strictly speaking, any additional coverage you get on top of a group life insurance policy your employer offers is considered supplemental life insurance. So why would you get insurance on top of insurance? Most group life insurance benefits only cover you for a year or two worth of salary. For someone making $50,000 a year, that’s only $100,000 in life insurance coverage. For anyone with small kids or a large mortgage (or both), that’s probably not enough.

How Much Supplemental Insurance is Enough?

With any life insurance policy, the typical advice is to get a policy that covers ten to fifteen times your annual salary. For someone who is making $100,000, that’s a policy worth a million to a $1.5 million. That might sounds like a lot. But remember you are insuring against a permanent loss of your income. Think about how many years of income you still have left in your career. That’s not even factoring potential promotions or raises you’ll hopefully receive before you would retire. All of a sudden, ten years of salary doesn’t seem that much.

There are other factors you should figure into the calculation. These include the following considerations.

Number of Dependents

The rule of thumb here is to add $100,000 to the policy for each dependent you have. I personally think this number is on the low side, especially for those with younger kids. College tuition and living expenses for four years alone is likely going to set you back $100,000 per child. You also have to account for the cost of raising your kids to working age. How much of a burden do you want your kids to be for your designated guardians?

Debt

Figure out how much debt you are currently carrying. You wouldn’t want your beneficiaries to default on any of the debt that you own. It’s one thing to let the lender take the car, but it’s an entirely different scenario if they lose the house. In addition to the mortgage, you should consider having enough to extinguish your student loans or credit cards debt. Remember, though, that consumer debt is NOT inherited by your heirs. So while you do want to make sure they don’t lose the house or family vehicle, they can’t be forced to pay off your credit card. However, your creditors could still attempt to get the money out of your estate. If successful, that means less assets to actually leave your family.

End of Life Expenses

This is a relatively small amount, but any known expenses should be factored into the equation. Figure between $8,000 to $15,000 that needs to be covered for end-of-life expenses that the policy can cover.

Affordability

Can you afford the premiums? A higher potential payout typically equals higher monthly premiums. There’s no way to get around that. If you can’t afford the monthly payment, you will probably just end up letting your coverage lapse. If you do that, there’s really no point having a higher policy limit in the first place.

Assets

The more hard assets you have, the less you need in life insurance coverage. When my dad passed away, he had a $50,000 life insurance policy. He was well into his retirement, but he had an old policy active that didn’t require him to pay any monthly premiums anymore. That $50,000 was quite a bit of money, but not a life changing amount. Luckily, my parents had enough saved so no one was depending on that payout. That’s why the $50,000 was more than enough for his situation.

If you have a lot of equity in real estate, stocks, or other investments, you can probably get by with a lower amount of life insurance. Your heirs can sell the property or cash out the assets to replace your income instead.

Opt for Supplemental Life Insurance with a Private Insurer

Supplemental life insurance you get through your employer is likely to be more expensive than if you get it elsewhere. After all, insurance companies know that it’s much more convenient for you to get a policy with the same insurer you already have basic coverage with. It gives them a bit more pricing power. They are in the business to make money, after all. So this makes sense.

Another strike against a supplemental insurance policy has to do with portability. In general, group insurance policies are owned by the employer. So it’s natural that your policy are tied to your employment. Typically, the policy will remain in effect for the year if you quit or are fired. Some insurance companies allow you to convert your policy to an individual policy when you leave your job, but it’s possible you would pay an even higher premium for the same coverage when you do so.

That’s why you are probably better off getting a life insurance policy from a private insurer instead of getting supplemental insurance from the employer. However, those who have health conditions or other habits that can make life insurance premiums jump (like being a smoker or those into extreme sports) may find that supplemental insurance is still attractive.

The Bottom Line

Supplemental coverage is an easy way to get life insurance. After all, nothing is more convenient than HR preparing all the documents for you and those monthly premiums being automatically deducted from your paycheck. However, as with everything that’s convenient, there’s usually a cost involved. In the case of supplemental life insurance, it’s usually higher premiums.

For those who are relatively healthy, it’s best to find a private insurer to get a policy. At the very least, you should shop around to see if you can get a better deal. By spending a bit of time on the process, you’ll likely save money — as well as have a better understanding on why you picked the policy limits that you chose.

Supplemental life insurance documents

Shutterstock

David Ning

Experienced Finance Writer

David is a published author, entrepreneur and a proud dad. He firmly believes that anyone can build a solid financial foundation as long as they are willing to learn. He runs MoneyNing.com, where he discusses every day money issues to encourage the masses to think about their finances more often.

Explore Life Insurance

variable life insurance Life Insurance

Variable Life Insurance: Pros and Cons

Recently, my uncle managed to cause quite a reaction in our family chat group. He claimed that he was still making monthly life insurance premium payments. It was a shocker, since he’s well into his 60s and retired early about ten years ago. For someone who’s not looking to protect his income, what exactly is […]

Read More about Post Title

5 minute read

No medical exam life insurance Life Insurance

Can You Get Life Insurance Without a Medical Exam?

For most people, life insurance is an important financial backup. After all, everyone wants to ensure that their family will be financially taken care of if they are suddenly gone. Unfortunately, most major life insurance policies require a fairly thorough medical exam. That typically means filling out a questionnaire about your (and your family’s) medical […]

Read More about Post Title

5 minute read

See All In Life Insurance

More from WalletGenius

Home Ownership

How To Win a Home Bidding War

I haven’t really talked about this publicly before, but we had to win a bidding war to buy our house last year. To make matters worse, it was right before the onset of the pandemic, making everything that much more stressful. Luckily, we succeeded and my family now enjoys living in a bigger, newer home. […]

Read More about Post Title

10 minute read

young couple redecorating a house Home Ownership

How To Redecorate Your House On a Budget

I’m not sure if it’s because everyone has been stuck inside due to the pandemic or just a coincidence. Whatever the reason, it seems like everyone I know has recently been updating their homes. Whether it’s a minor or major redecoration, all this time indoors has spawned a bunch of amateur interior designers. If you’ve […]

Read More about Post Title

7 minute read

Woman at Farmers' Market Save Money

How To Save Money Shopping At The Farmers’ Market

Buying from a road-side produce stand or a locals farmer’s market is an amazing experience. They are some of the best options for getting fresh (and often organic) fruit, vegetables, meats, and other products, while still supporting local farmers. Farmers’ Markets are certainly a better choice for fresh, high-quality, in-season produce. The prices there are […]

Read More about Post Title

7 minute read

stock market short seller Investing

How to Short a Stock: A Complete Guide

I first learned about short selling from my Dad. It was in the dot-com crash of the early 00s, when practically every investment was going down. Many people lost their savings because they plowed too much money into ridiculously-valued tech stocks. Looking back in retrospect, these stocks were already so high that they had no […]

Read More about Post Title

11 minute read

Man happy about investing Investing

What Are Bearer Bonds (and How Do They Work)?

A bearer bond is a fixed-income security, very similar to a regular bond. However, a bearer bond is owned by the holder (or bearer) rather than by a registered owner. The coupons for interest payments are physically attached to the bearer bond. The bondholder is required to submit the coupons to a bank for payment […]

Read More about Post Title

5 minute read

Trusted provider of accurate rates & financial information