What Is Supplemental Life Insurance: How Does It Work & Is It Worth It?

Supplemental life insurance is additional coverage you can purchase through your employer to fill gaps left by your basic life insurance policy. Most employers offer basic life insurance equal to one or two times your annual salary as part of your benefits package. Supplemental life insurance coverage lets you increase that amount, up to three to five times your salary. Also called voluntary life insurance or supplemental employee life insurance, this workplace benefit increases your death benefit protection through payroll deductions.

Supplemental coverage provides extra financial protection in the form of a death benefit for your beneficiaries but comes with restrictions. Policies lack portability, meaning coverage ends when you leave your job. Coverage amounts are also limited compared to individual term life policies. Most buyers are better off with a term life policy, but supplemental insurance is worth it in these situations.

Like other insurance policies, supplemental life insurance pays a death benefit to your beneficiaries if you die while covered under the policy. Your beneficiaries can use this money for any purpose or to pay any debts, including:

• Mortgage payments and housing costs
• Daily living expenses and income replacement
• Outstanding debts like student loans, credit cards and car loans
• Funeral and burial expenses
• Children's education costs
• Medical bills

Offered as an add-on to employer-sponsored life insurance, supplemental coverage lets you increase protection for yourself, a spouse or dependents. Premiums are deducted from your paycheck, and enrollment may not require a medical exam. This makes supplemental life insurance accessible for those with health conditions who struggle to qualify for individual policies.

Premiums increase as you age because most employer plans charge higher rates for older employees. During your initial enrollment period, many employers let you purchase $50,000 to $100,000 in coverage without answering health questions or taking a medical exam. If you want coverage above that amount, you'll need to complete health questionnaires or undergo a medical exam.

Coverage has limited benefits and doesn't follow you if you leave your job. Supplemental life insurance works best as a short-term solution or a complement to a personal life insurance policy.

Financial experts recommend total life insurance coverage of 10 to 12 times your annual salary. Subtract what you already have from your employer and any personal policies to find your coverage gap.

For example, if you earn $60,000 and need $600,000 in total life insurance coverage but your employer provides only $60,000 in basic life insurance, you have a $540,000 gap. Supplemental coverage helps close part of this gap, though employer plans cap at five times salary or a max of $500,000.

Your coverage needs change over time. They peak in your 40s when you have a mortgage and children approaching college age. As you near retirement and pay down debts, you need less coverage.

Supplemental life insurance is not worth it in many cases. These are the disadvantages:

• Cost: Supplemental life insurance rates are higher for comparable levels of coverage than standalone term life insurance policies. See the analysis below
• Flexibility: Supplemental life insurance through an employer lacks the flexibility of term life policies. You may be unable to keep your policy if you change jobs.
• Low coverage amounts: Supplemental life insurance provides relatively low coverage amounts, which may not adequately meet your family's financial needs if you die.
• False security: Supplemental life insurance coverage tied to a primary policy creates a sense of false security, leading to underestimating coverage needs.

Supplemental life insurance through your employer costs about $18 per month for $150,000 in coverage. An individual term policy costs about $25 per month but provides $500,000 in coverage. The individual policy also follows you between jobs and locks in your rate for 20 years. For just $7 more per month, you get more than three times the coverage and keep it regardless of where you work.

Talk to your HR department about supplemental life insurance options during your employer's annual open enrollment period, typically held in October or November. You can also enroll within 30 days of a qualifying life event like marriage, divorce or the birth of a child.

Supplemental life insurance works best as a temporary solution if your employer offers it free or health conditions prevent you from getting individual coverage. For most people, individual term life insurance provides better value. A $500,000 term policy costs about the same as $150,000 in supplemental coverage and follows you between jobs. Calculate your coverage needs and compare both options before deciding.

Learn more about supplemental life insurance to determine whether adding it to your financial planning and insurance strategy is worth it.