What is Supplemental Life Insurance Vs. Basic Life Insurance?

What is Supplemental Life Insurance Vs. Basic Life Insurance?

You don’t have to be an extreme risk-taker to need life insurance.

Life insurance is an essential tool to protect your loved ones financially, ensuring you leave behind a legacy, not a pile of bills.

In this guide, we’ll answer the question, “What is supplemental life insurance vs. basic life insurance,” and help you decide the best option for your family.

What is Life Insurance?

Life insurance provides income to your survivors in the unfortunate event of your passing. Mainly, it’s used to help cover burial costs, pay off the mortgage, or pay for your children’s education.

Many employers, unions, and other membership organizations offer basic life insurance as part of their benefits package, providing a certain level of security. However, many people overlook whether their coverage is sufficient.

For some, especially those with families, debt, or long-term financial goals, basic life insurance coverage isn’t ample and often falls short. That’s where supplemental life insurance comes into play. 

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What is Basic Life Insurance?

Employers and membership organizations often offer a basic group insurance policy for a free or a minimum premium. This type of insurance typically pays out a death benefit to your beneficiaries if you die while employed by that employer.

However, basic life insurance policies offered by employers are typically capped at lower amounts, usually within the range of $25,000 to $50,000, or one or two annual salaries. This money is paid out as a one-time payment to your beneficiaries. 

The benefit of basic life insurance is that employees are usually automatically enrolled when they join a company. However, the limited, fixed death benefits and minimal customization options impose certain limitations that beg the question of sufficiency. This is particularly true if you provide for a non-earning spouse, children, and aging parents in your care. 

It’s important to consider how long your survivors might need financial support in case of your untimely passing, and a one-time payment of, let’s say, $50,000 will likely not suffice.

That leads us to the next question, “What is supplemental life insurance ?” 

What is Supplemental Life Insurance?

As its name indicates, supplemental life insurance is an insurance option designed to fill in the gaps in the basic insurance coverage provided by your employer, association, or membership organization. However, unlike basic group life insurance offered by your employer, supplemental life insurance is an extra-cost benefit you must pay for out of pocket. 

This type of insurance is frequently offered by employers as an optional benefit for employees who want more coverage than their basic life insurance. In some cases, you can only obtain supplemental coverage during the employer’s annual benefits enrollment or in case of a life-changing event, such as getting married or having a child. 

The price of supplemental life insurance is often determined by your employer’s group rate. In this case, the life insurance company evaluates the demographics, life expectancy, and policy design for each employee group. The pricing is then determined based on each group’s expected claims. 

However, supplemental life insurance carries a customizable component: the amount of benefits your survivors receive in the case of your untimely passing. Naturally, this affects the cost of your premium, and the higher death benefits will carry heftier premiums. 

Additionally, you might have to fill in a questionnaire or undergo a medical exam to determine the state of your health, as your age, health, lifestyle choices, and other factors might also affect the rate. For example, if you’re smoking, you’re likely to pay higher premiums. 

Different Types of Supplemental Life Insurance

Supplemental life insurance is often available through your employer and usually comes in a variety of types, which are outlined below.

Term Life Insurance

Term life insurance provides supplemental coverage for a specific period, which ranges from 10 to 30 years. If you pass away during this time frame, your beneficiaries receive a payout, which is generally higher than the basic life insurance offered by employers.

If the term expires, you’ll be able to renew the policy. However, renewals often come with higher rates due to age or developed health issues. Term life insurance is the most common type of supplemental life insurance. 

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Permanent Life Insurance

Permanent life insurance isn’t as common as term life insurance. Unlike time-limited term insurance, permanent life insurance policies remain in effect as long as you keep paying your insurance premiums. 

The most common permanent life insurance is whole and universal life insurance. The former is often associated with higher premiums when compared to term insurance, but they don’t increase over time. Universal, however, allows you to adjust your premium depending on your budget as long as you can cover a minimum premium amount. 

Both policies come with a cash value component, allowing you to earn interest or investment gains on your policy. You can then use this value to obtain a loan or surrender the policy, in which case you’ll receive the policy’s accumulated cash value. The amounts associated can sometimes be quite substantial. 

Spouse or Child

Some supplemental life insurance policies let you to extend the coverage to your spouse, domestic partner, and children. However, it’s important to be aware that death benefits associated with family members are usually lower than your benefits. 

AD&D

Accidental death and dismemberment can be added as supplemental life insurance, and many employers and insurance companies offer AD&D as an optional rider to both basic and supplemental policies. 

This type of insurance provides benefits if the insured person dies or suffers a severe, often life-changing injury, such as loss of vision or loss of limb, as a result of an accident. This type of policy is usually complementary, as it only pays out under specific circumstances. 

Related Content: What is the Difference Between Term and Whole Life Insurance?

Benefits of Supplemental Life Insurance

When it comes to life insurance, supplemental policies offer several benefits compared to basic life insurance. Those benefits include: 

  • Higher death benefits: Adding supplemental life insurance to your basic policy can significantly raise your benefits limit by a greater multiple of your annual income or even tie it to a specific dollar amount. 
  • Spouse and dependent coverage: Supplemental life insurance often provides options to extend your coverage to your spouse and dependents, ensuring the financial protection of your entire family in the case of a tragic event. 
  • Customizable options: Supplemental life insurance is more customizable than basic life insurance, allowing you to select the coverage that fits your financial needs. 

Overall, supplemental life insurance offers higher benefits, extended coverage, more customizability, and, in some cases, portability. 

Should You Get Supplemental Life Insurance?

Hopefully, you now have a clear answer to the question, “What is supplemental life insurance vs. basic life insurance?” Whether supplemental life insurance is necessary for most people depends on individual circumstances, financial goals, and existing coverage.

If you’re worried about leaving your family with a substantial financial burden, buying more insurance can provide peace of mind, making supplemental life insurance a wise choice. This type of insurance works best when complementing individual insurance plans.

While it may be pricier, it offers more significant benefits to support your loved ones in the case of your premature passing. If you’re looking to leave behind a larger inheritance or pay for your children’s education, it may be the right choice for you.

If you want to learn more about insurance, NJ Life Insurance Options can offer guidance on different financial options, fiscal knowledge, and other financial advice. 

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