What Is Supplemental Life Insurance and Who Should Buy It?

Supplemental life insurance, often defined as an optional add-on or extra life insurance, allows employees to increase their basic life insurance coverage. This type of insurance benefits those who find their employer-provided basic life insurance insufficient for their family's needs. Supplemental employee life insurance can be a strategic choice for those seeking a cost-effective way to enhance their life insurance benefits beyond the basic coverage, which often covers minimal funeral expenses.

Postal and governmental employees get Federal Employees’ Government Life Insurance (FEGLI), which grants postal employees free coverage, and government employees pay two-thirds of the cost. Optional supplemental life coverage is an upgrade add-on for those needing greater protection. This coverage ensures that individuals can secure additional life insurance benefits at their own expense, which suits those seeking extended family coverage.

Supplemental life insurance coverage, also known as supplementary life insurance, is coverage that enhances an existing life insurance policy. It's often used when basic employer-provided insurance is insufficient and offers extra financial protection for specific needs, such as funeral expenses or the well-being of dependents.

Unlike standard life insurance policies, supplemental insurance is not a standalone product but an add-on to existing coverage. It allows policyholders to tailor their insurance to their unique needs — often without a medical exam — and is typically more affordable and accessible through group rates provided by employers.

Supplemental life insurance provides more coverage than employer-provided life insurance coverage, which may not meet the needs of breadwinners and high-income earners. After selecting basic life insurance coverage, the employee can add supplemental life coverage. A supplemental life plan can be a cheaper, faster and easier way to get more coverage without meeting the strict requirements of most traditional life insurers.

This extra life insurance coverage has several specific characteristics, including:

Eligibility for supplemental life insurance typically extends to employees already participating in their employer's basic life insurance plan. This option is available to specific groups and provides a simple way to get additional coverage.

Private-Sector Employees

Employee supplemental life insurance, also known as supplemental group life insurance, upgrades the basic life insurance offered through employer-sponsored benefits as part of a compensation package. Supplemental life insurance through an employer is available only if you get basic life coverage. It's typically capped to equal the underlying basic life coverage.

Federal Employees

Federal employees can purchase optional supplemental employee life insurance after they're automatically enrolled in basic life insurance. They can buy optional insurance with coverage up to five times their annual base pay, rounded to the nearest $1,000. Federal employees can also purchase supplemental spouse life insurance and supplemental child life insurance, with up to $25,000 coverage for the spouse and $12,500 per eligible dependent.

Postal Employees

Postal employees have the same insurance options as federal employees but receive free basic life insurance coverage. Additionally, if they die before age 45, their beneficiaries receive an extra benefit from the government, even if they haven't opted for optional insurance coverage.

Supplemental life insurance boosts the financial safety net for individuals and their families, offering various options to address specific coverage needs and life circumstances. The most common types of supplemental life insurance are:

Each type of supplemental life insurance meets different needs and offers various benefits. Assess your financial situation and coverage goals when considering these options.

Supplemental life insurance rates differ per group, just like for each individual getting life insurance. However, basic life insurance is usually cheap or may even be free for employees. Individual term life rates cost more, averaging $19 per month for women and $23 per month for men for a 10-year term with $250,000 in coverage. Some factors that could impact the cost of your supplemental coverage include:

Supplemental life insurance coverage has advantages and drawbacks. Evaluating these can help you make informed decisions that align with your financial goals and clarify the value and limitations of extra life insurance benefits.

Supplemental employer life insurance isn't for everyone but can be a great add-on to increase coverage if basic life isn’t enough. If any of the below criteria apply to you, you could benefit from supplemental coverage:

Most life insurance professionals recommend multiplying your annual base salary by 10 to easily calculate how much life insurance coverage you need. Depending on your needs and circumstances, that might not be enough or too much coverage.

Consider three other ways to compute your life insurance needs:

• Ten times your salary plus college expenses: This method involves adding projected college costs for your children to the baseline of 10 times your annual salary. It's a tailored approach for those prioritizing educational expenses in their coverage. Start by adding the average cost of college tuition and fees to 10 years of your salary.
• DIME formula: The DIME (debt, income, mortgage and education) formula provides a comprehensive look at your financial obligations. Adding any outstanding debts, income replacement needs, mortgage balance and future educational costs allows you to get a more personalized coverage amount.
• Human life value: This approach assigns a monetary value to your economic contribution to your family that considers your current income, potential future earnings and financial impact if you were to pass away unexpectedly. It's a holistic method that underscores the value of your role within the family's finances.

While supplemental life coverage provides specific benefits, exploring alternatives can offer different advantages based on your financial needs and goals. Consider these effective options:

• Individual life insurance policies: These are not tied to employment and can be customized to your specific needs. They typically offer greater flexibility and higher coverage limits than supplemental life insurance through an employer.
• Health savings accounts (HSAs): An HSA is a strategic financial tool that allows you to save for medical expenses on a tax-advantaged basis. It can complement your life insurance by reducing out-of-pocket medical costs.
• Disability insurance: This type of insurance provides income replacement if you become disabled and cannot work, filling a gap that life insurance doesn't cover.
• Critical illness insurance: It covers expenses related to serious illnesses like cancer or heart attacks, providing a lump sum to help manage high medical costs and other related financial needs.
• Annuities: These offer a steady stream of income after retirement and can complement or serve as an alternative to life insurance, especially if long-term financial stability is your goal.

These alternatives to supplemental life insurance coverage offer various features and financial benefits, making them valuable additions to a comprehensive financial strategy. Each option addresses specific financial needs and can be tailored to fit your unique situation.

Supplemental life insurance doesn’t have to be confusing or complicated. Here are answers to some common questions about voluntary life insurance coverage.