Supplemental life insurance is a way to add more coverage to a group life insurance policy you already have through your employer. Sounds like a smart move, right? Hold on a minute.
Extra coverage might sound like a great idea. Look deeper, though, and you’ll find out supplemental life insurance is long on cost and short on value.
We know all the types of life insurance can seem a little confusing at first. But when you break it down, it’s simple! We’ll take you through the ins and outs of both group and supplemental life insurance. Then we’ll help you find the best way to get your life insurance needs covered.
Let’s dive in!
What Is Group Life Insurance (and How Does It Work With Supplemental Life Insurance)?
Maybe you already have group coverage, or maybe you’re new to both group life and supplemental life. Either way, you should know these policies tend to go hand in hand.
You can get a group life policy without any supplemental coverage (and you should if it’s free to you as an employee benefit), but you can usually only have supplemental if you already have group. Got it? Okay!
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The most likely time you’d hear of group life insurance is when you’ve started a new job. Many companies offer it as a free employee benefit. So long as it’s free, you’d be crazy to pass this up—because who doesn’t want a free benefit that could someday help their family?
So far, so good. But where does supplemental life insurance come in? We honestly think it shouldn’t come in anywhere. But you’ll often hear about it as an option while you’re hearing about your employer’s group life benefit. Employers are aware that the group life policy is skimpy on the payout. So they’ll offer supplemental life insurance in the same spiel. The thinking goes, Why not use the convenience of a payroll deduction and get a heftier policy?
Stop right there! Even combined with group coverage, supplemental life insurance will never get you coverage that’s as good or reliable as a cheap term life policy. Let’s see why:
- Group life insurance doesn’t give you much coverage—usually only a year or two of your salary. Trust us, that’s not enough money if you have anyone depending on your income for their daily expenses.
- Unlike term life insurance, which gives you a locked-in rate over a defined period like 15 or 20 years, supplemental coverage is typically renewed annually as part of open enrollment—and the price will rise each year. (Yeah, it’s more expensive to buy life insurance as you age.)
- Until you’re self-insured, you need a term life policy with a death benefit somewhere between 10–12 times your annual income. It’s very affordable, and it’s the only way you’ll know your family is well provided for long after you’re gone. To get an idea of how much coverage you need, check out our term life calculator.
- Supplemental life insurance is not always portable. In other words, it could disappear the day you change jobs. Whoops! Vanishing life insurance doesn’t exactly give you a secure feeling. To get that, you’d want to get yourself (and your spouse) term life coverage that’s locked in for the life of the policy.
To sum up what it looks like to win with group and supplemental life: Take any free group coverage you’re offered, but skip anything that would come out of your pocket. Take those savings and get a 15–20-year term life policy worth 10–12 times your annual income.
Types of Supplemental Life Insurance
Wait. There’s more than one kind of supplemental life insurance? Sure there is! Let’s look at a few of the common types.
Supplemental Employee Life Insurance
This is the most basic kind, as we already mentioned above. It’s a way to beef up your group life policy from your employer. You don’t need this, even if you’re already benefiting from free group coverage. Instead, put that payroll deduction toward term life insurance.
Supplemental Spouse Life Insurance
At this point, we’re starting to get into the tricky—and sometimes tempting—sales gimmicks used to market supplemental life. A lot of employers offer life insurance for your spouse or domestic partner if they’re not already covered by any type of life insurance.
Sounds sweet and thoughtful, right? While it might sound easy to sign them up at the same time as you, there’s a catch. Because it’s a policy that rides along with your group life insurance, the payout is almost never going to be high enough to replace their income. Even if they’re a stay-at-home parent, it won’t be enough.
Just like the other versions, supplemental spouse coverage is an unnecessary waste of cash. Don’t get us wrong—your spouse’s life is valuable. And they do need life insurance. But a payroll deduction tied to an employee benefit is not the smart solution. Your spouse needs their own term life policy to last for however long the two of you have dependents. It’s not only cheaper, it’s also more reliable than a policy tied to a job that could change next week.
Supplemental Child Life Insurance
The insure-your-kids version of supplemental life insurance can be a tough one to say no to. After all, they’re your littles! You gotta insure them, right? We know the heart behind the impulse to get life insurance for children, but it misses the big-picture purpose of life insurance. Kids don’t usually have any income to replace, so this is another emotional sales gimmick. If you really want to protect your children—and we’re certain you do—be sure you and your spouse have term life insurance that can replace your income when you’re gone.
Accidental Death and Dismemberment Insurance
We smell an emotional ploy! Accidental death and dismemberment (AD&D) covers you if you lose a limb (the dismemberment part) or die “accidentally”—which, the last time we checked, is the same as dying in the regular sense of the word.
If you already have a life insurance policy that covers whatever kind of death you can come up with, why would you need additional coverage for an “accidental” death?
Hint: You don’t. Not only are these policies cheap, they’re also worthless because of the long list of conditions the insurance company says it won’t pay out for. Buyer beware: The devil is in the details, and AD&D policies are chock-full of those details.
Burial or Final Expense Insurance
If thinking about your loved ones when trying to make a decision about life insurance didn’t make you emotional, thinking of them being grief-stricken while planning your funeral certainly will. But don’t let your emotions overrule your actions!
Final expense insurance or Burial Insurnace is another policy you can do without. It’s designed to pay for your final expenses when you die, and it’s usually aimed at older people who want to take away the stress of funeral expenses from their family. But here’s the thing about dying: Eventually everyone does. So as far as finances go, it should be easy to plan for.
The average funeral costs just under $8,000.1 But instead of paying a monthly payment for a burial insurance policy to cover that cost, you could save, say, $50 every month and invest it somewhere (like a mutual fund) that earns you an average of a 10–12% return per year.
If you started at age 30, you’d have more than $1 million by the time you’re 78. That’s enough for a funeral worthy of a celebrity!
The truth is, a good emergency fund and the right amount of term life insurance should cover the cost of death and funeral expenses, hands down. So there’s no reason to bother with a separate policy.
Should I Buy Life Insurance Through My Employer?
No one should buy life insurance through their employer. But as mentioned before, you can go ahead and sign up for the basic (and free) group life insurance through your employer, because skipping it would mean passing on free money. (And that would be dumb!) Did we mention that the key word here is free? Because not even the basics are worth signing up for unless they’re provided to you at no cost.
Whatever you do, don’t shell out for supplemental life insurance.
If you’re going to be spending money on life insurance, your best bet is buying term life insurance through an insurance agent outside of work. You’ll save on premiums that way, compared to the supplement through your employer.
Not only will this private term life insurance give you more of a death benefit, but it’ll also stay with you through whatever job you have.
And don’t forget to get some long-term disability insurance too (more on this soon), which will cover lost income if you become injured or disabled and can’t work.
Do I Need Any Life Insurance Riders?
Riders are additional coverage or benefits added to an insurance policy for an extra charge. Once you’ve signed up for group life insurance at work, the insurance rep might try to sell you these riders to your life insurance too. Spoiler alert—you don’t need any of these either!
The Types of Life Insurance You Actually Need
Life insurance is there to provide for your loved ones when you die. It’s a big job, but a good term life insurance plan is more than up to the challenge. We can never say it enough—we recommend buying term life insurance that’s 15–20 years in length and covers 10–12 times your income.
Do you need anything beyond term life insurance? Well, yes! You should always have some long-term disability insurance in place. It’s just as important as getting term life insurance.
How much long-term disability insurance do you need? We say get as much coverage as you can—around 60–70% of your income. This is the amount of your salary you bring home on a normal day (once you’ve accounted for taxes, Social Security, and other things that come out of your paycheck).
Term life and long-term disability insurance go hand in hand in giving you and your family the protection you need.
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If you’re in the market for new life insurance or want an expert to talk to, we recommend Zander Insurance, a RamseyTrusted company. They’re trustworthy experts who won’t overload you with a bunch of supplements you don’t need. Don’t let another day go by without protection. Start here to get your term life insurance quotes.