What is supplemental life insurance? Definitions, benefits & choosing coverage

Many people get their first group term life insurance as a perk from their employer. It's commonly offered as part of an employee benefits package and can provide a valuable cushion in the event of a loss. 

However, while employer-sponsored life insurance does offer you a layer of protection, it may not be enough to ensure your family is financially healthy in the event of your death. Supplemental life insurance can help you close coverage gaps in group plans, and in good financial seasons, it can provide opportunities to give back to causes you care about.

Supplemental life insurance, or voluntary life insurance, is optional coverage in addition to what your employer may provide. Many employers offer life insurance as part of a group plan. Most of the time, the contract offered through your employer provides a basic amount of coverage at little or no cost. Basic coverage may be offered as a fixed dollar amount (such as $20,000) or as a multiple of your salary (such as one or two times your annual salary).

That level of coverage can help with immediate expenses, but it may not be enough to cover major living costs like mortgage payments, childcare or education when you die. That’s where supplemental life insurance comes in.

• Term coverage. A term life insurance contract provides coverage for a specified period of time (a "term"), after which it expires and no longer provides coverage.
• Permanent coverage. Permanent life insurance allows you to maintain coverage indefinitely as long as you continue to pay the premiums. Permanent life insurance can accumulate cash value over time.
• Family coverage. You may have the option to buy a contract that covers your spouse or children, beyond the individual life insurance your employer provides just for you.
• Burial coverage. Burial insurance is designed to cover funeral and related end-of-life expenses, ensuring these costs don’t burden your loved ones.

Let's say your employer provides, at no cost to you, life insurance valued at one times your annual salary, which is $65,000. That amount of coverage would be very helpful for the immediate expenses faced by your family after your death. But you might realize that a higher amount of coverage, perhaps hitting $195,000, or three times your salary, would help to sustain the family without your income during a longer season of grief.

In that case, you could seek a supplemental life insurance contract that offers a death benefit at two times your salary, or $130,000, so that between the multiple policies (your employer-sponsored coverage and the supplemental policy), you’d reach your goal amount of coverage.

Basic life insurance offers a small benefit upon your death and is usually part of an inexpensive or free group plan offered at work. Having some basic coverage is not a bad thing; the problem is that it might not be enough to help you stay on track for your goals.

Supplemental coverage provides more options and greater coverage, and it's something you pay for instead of your employer. You may be able to choose riders or customizations for particular expenses (for example, earmarking some portion of the benefit as burial coverage), or create multiple policies or bundled policies that cover all members of your family or simply give you higher limits for coverage.

Many providers find that a higher multiple of their salary, such as 10 times their annual salary, offers more substantial protection so family members won't have to worry about creating additional income for many years following the death.

You can select supplemental group coverage through your employer (if they offer it) or private supplemental coverage from a company of your choosing. With either, you'll generally be expected to pay the premiums for the extra coverage (through work or through a private company) for as long as you want to maintain it. Many people opt for both, which allows them to take advantage of the affordable rates of their group employer-sponsored plan, then use a private contract to supplement up to their desired amount of coverage.

One of the benefits of group coverage through your employer is that it usually doesn’t require a medical exam. That's a big mark in favor of taking advantage of any group coverage available to you, even if you also get supplemental coverage. Health can change suddenly, and locking in some coverage, whether through your employer-sponsored plan or a private supplemental contract, at your current age and health level can offer comfort. This is especially true since premiums tend to go up as you age.

Another benefit of supplemental coverage through your group plan is that your premiums are deducted from your paycheck, which can be an easy way to pay. That said, you also easily can set up autopay if you choose individual supplemental life insurance.

One major downside of relying solely on employer coverage is that it typically ends if you leave the job, which can leave your family financially vulnerable during a transition. Even if you plan to stay with the company long term, it's important to take the time to know what your options are.

Calculate your needs

A great path to understanding whether supplemental coverage is right for you is to use a life insurance calculator that allows you to determine the ideal coverage for your needs. Then, you can use this number to compare with your employer-sponsored group coverage.

Purchasing supplemental coverage brings benefits like higher coverage limits, flexible riders, portability and options to protect a stay-at-home spouse or children. The main downsides of supplemental coverage are due to the variety of options available: You'll probably have to do some shopping around to find the right contract at the right price, and the process of medical exam-based underwriting can present an additional hurdle. Let’s look at why you might opt to get supplemental coverage and what challenges you might need to manage along the way.

• Flexibility. Supplemental contracts often have customizations that simply aren’t available in a one-size-fits-all, basic plan from your employer. Some of these things may be more expensive, but they also will be more precise to your needs. 
• Additional coverage at the right price. You can compare the premium cost with the available benefits and find a contract that's affordable for what you want. For instance, doubling your coverage doesn’t always double your premium. The cost per dollar of coverage actually may be lower at higher coverage amounts.
• More protections/choices. Because basic coverage is often limited, people who want riders that specifically pay off certain debts or obligations or who want coverage for multiple people find supplemental coverage very helpful.
• Portability. If the supplemental coverage is structured as an individual contract rather than part of an employment-contingent group plan, you can take it with you even when you leave a job. 

• Research required. There’s something to be said for just checking a box and getting your affordable basic contract. It requires more effort if you want a good deal on an add-on life insurance contract, especially if you opt to shop around. 
• Medical exams. Many supplemental individual contracts handle risk by pricing after they do a medical exam. This can disqualify folks for a contract or raise premiums. 
• Costs. Realistically, group contracts often spread out risk and have employers subsidize premiums. Many supplemental coverages may be more expensive than group coverage, and it will be your responsibility to pay the premium.

Major life milestones—such as marriage, home purchase or starting a business—are ideal times to re-evaluate your perfect life insurance coverage. For instance, it might be a good time to look for more coverage when you:

• Get married or divorced
• Have a child
• Take on a new mortgage on a home
• Launch or grow a business
• Take out a loan or co-sign a loan for a car or educational expenses
• Move into an area with a higher overall cost of living, even without going into debt

While other life circumstances can prompt supplemental coverage consideration, these moments are a nice way to remind yourself that the amount of coverage you have from your employer-provided basic plan may no longer provide the protection you’re looking for. 

That being said, extra life insurance protection isn’t the only way people safeguard their families in the case of a future loss. Regularly saving for an emergency fund, investing in retirement accounts and seeking out disability insurance coverage are other valuable considerations at milestone moments in your financial life. 

The sturdy supports you need to financially protect your family are built brick by brick—basic life insurance coverage offers one layer of protection, while adding supplemental life insurance can be a crucial additional layer.

Understanding exactly which insurance products will meet your needs is easier with someone like a Thrivent financial advisor in your corner. Your advisor can help you sort through your options and fit them into your wider financial values, building strong foundations and sturdy supports for your long-term financial clarity.