Supplemental life insurance: Definition, pros, cons & choosing coverage

In addition to your salary and health insurance, one of the biggest perks of a job is the life insurance benefits employers often provide.

However, while employer-sponsored life insurance does offer you a layer of protection, it may not be enough to ensure your family is properly cared for in the event of your death. Supplemental life insurance can help you close that gap and provide opportunities to give back to causes you care about.

Supplemental 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 no cost. In these cases, the death benefit might be a fixed dollar amount such as $20,000 or a multiple of your salary (such as one, two or three times what you make). Which may not be enough for you and your family's needs. That's where supplemental life insurance can help.

Let's say your employer provides life insurance valued at one times your annual salary for free. If you feel that you need more coverage, you might decide to buy supplemental life insurance valued at two times your salary. You'll still receive basic coverage at no charge, so you'll end up with coverage totaling three times your salary.

Supplemental coverage typically comes in the following basic forms:

• Term coverage. A term life insurance contract is one that provides coverage for a specified period of time (a "term"), after which it expires and no longer provides coverage. These contracts are the most affordable, but they do not accumulate any cash value.
• Permanent coverage. Permanent life insurance allows you to maintain coverage indefinitely as long as you continue to pay the premiums. On top of providing a death benefit, permanent life insurance accumulates cash value that you may be able to withdraw or borrow from.
• Family coverage. Employers generally only provide insurance that covers the employee, but you may have the option to buy a contract that covers your spouse or children through your group plan.
• Burial coverage. Burial insurance is intended to cover the expenses associated with your funeral.

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 for as long as you want to maintain it.

Keep in mind: Obtaining any type of life insurance coverage is typically based on health. If you are generally healthy, it may be less expensive for you to obtain additional coverage independently from an employer plan. Since group coverage generally doesn't require underwriting, it is typically priced to the median.

While it's a good idea to consult a financial advisor and your HR department to get a full picture of your options, considering these pros and cons may also help.

• Portability. The most significant benefit of a private contract is that it's not tied to your employer. Your coverage doesn't end if you leave or are let go from your job.
• Flexibility. You're not limited to what's available in your group plan. You can find both term and permanent private plans to fit just about any need. You'll also have more options, such as riders to cover family members and burial expenses.
• Potentially less expensive. Private contracts can be potentially less expensive than group coverage for the same amount of coverage if you're healthy and meet standard or better risk class.

• Potentially more expensive. Private contracts can cost more if you are rated higher than standard risk class for the same amount of coverage. It's a good idea to understand your options for both and compare them before choosing.
• Eligibility requirements. Because you're purchasing the insurance on your own, you'll have to qualify. This likely includes at least a health screening and possibly a medical exam.

• No health exam. In most cases, you won't need to go through individual medical underwriting or a health screening. Often, all that's required is filling out a form and paying the additional premium.
• Easy payment. The premium is deducted from your paycheck, which may be more convenient than paying separately.

• Doesn't stay with you. Like your basic coverage, your supplemental group coverage typically ends if you stop working for the employer.
• Potentially hard to replace. If your group coverage ends because your employer drops the benefit or you leave the job and your new employer doesn't have a life insurance benefit, you'll be starting fresh when you seek new coverage. You'll be older, your health may have changed, and you may have to pay more.

Life insurance is there to relieve your family from some of the financial strain they would feel if you were to pass away. The total amount of coverage you need depends on the financial obligations you have, the support you provide and the financial legacy you want to leave for your family.

For example, you may need more coverage if you have young kids at home. In addition to replacing the income you'd no longer earn, you may want to replace your spouse's income so they can spend more time caring for your children or grieving. It may be important to you that your house and cars are paid off so your family doesn't have to worry about those debts.

You also may want part of your death benefit to be used as a charitable gift to provide support to causes that are important to you.

It's unlikely that your basic group plan will have a large enough benefit to cover all those concerns. Supplemental coverage can make up the difference to cover the financial obligations you and your family identify, as well as make an impact on the world around you.

Is supplemental life insurance right for you? If your group plan doesn't provide enough coverage or you're concerned about losing your coverage when you change jobs—it may be a good idea. To find out more about what life insurance coverage you might need for your individual situation, contact a Thrivent financial advisor for help evaluating your options.