Supplemental (voluntary) life insurance at work

Supplemental life insurance, also called voluntary life, is extra group term coverage you buy through your employer on top of the basic benefit, paid by payroll deduction. It is convenient and often available without a medical exam up to a stated amount, but the price rises with age in bands, and the coverage usually ends or becomes costly to keep when you leave. For healthy people in their 30s and 40s, an individual level term policy is often cheaper over the long run; for people with health problems, supplemental coverage can be the better deal.

How supplemental life works

The employer arranges a plan with an insurer, and eligible employees choose how much to buy, typically in increments of $10,000 or $25,000, or as a multiple of salary (1x to 5x is common). Each employee pays the full premium. Because the plan is voluntary life insurance under a group life insurance contract, the employer usually does not subsidize it, though payroll deduction makes it easy to pay.

Typical features:

• Guaranteed issue amount. New hires who enroll when first eligible can often get a set amount, for example up to $100,000 or a few times salary, without health questions. This is guaranteed issue coverage.
• Evidence of insurability above that amount. Higher amounts, or coverage you try to add later, usually require a health questionnaire and sometimes an exam. This is evidence of insurability, and the insurer can decline.
• Annual enrollment. You can often increase coverage during open enrollment, but increases above a limit require evidence of insurability.
• Spouse and child coverage. Many plans let you add dependents; see dependent life insurance through an employer.
• Add-ons. Optional accidental death and dismemberment coverage, accelerated benefits for terminal illness, and a waiver of premium if you become disabled.

Why the price changes

Supplemental premiums are usually quoted per $1,000 of coverage per month and set by five-year age bands, so your price steps up as you cross each one. Many plans also distinguish smokers from nonsmokers. The pattern is attained age pricing, which makes the plan inexpensive when you are young and increasingly costly as you age, and insurers can change the rates for the whole group at renewal.

By contrast, a level term life insurance policy bought individually keeps the same premium for 10, 20 or 30 years. A group plan's low entry price can therefore overstate its long-run value. One way to check is to compute the total cost over the years you expect to need coverage, not just this year's deduction.

Hypothetical example

Say a healthy 35-year-old nonsmoker needs $500,000 for 20 years. The plan charges, for illustration, $0.08 per $1,000 a month in the 35-39 band and $0.12 in the 40-44 band, with higher bands after. That is $40 a month at the start, $60 a month at 40, and more after. A comparison quote for 20-year level term gives one fixed premium for the whole period. Add the group premiums for each age band over the 20 years and compare with the fixed premium times 240 months. The group rates in this example are invented for illustration; get actual quotes from your plan and from insurers.

Tax and cost points

• Premiums are after-tax. Employees generally pay supplemental premiums with after-tax money, so the death benefit stays income-tax free.
• Imputed income applies only to employer-paid coverage. The IRS Table I rule for coverage above $50,000 applies to group-term life that the employer pays for; coverage you pay for at the full Table I rate or more does not create imputed income. Mixed plans are explained in group life over $50,000 and imputed income and the imputed income calculator for group life over $50,000 can estimate it.
• Compare against your total cost. Add the monthly premium for each year you expect to hold the coverage, and compare it with a quote for level term with the same amount and length.

When supplemental coverage makes sense

It is a strong fit if you:

• Have a health condition that would make individual coverage expensive or unavailable, and the plan accepts you at a guaranteed-issue amount.
• Need coverage quickly without waiting for underwriting.
• Want a small, temporary top-up, such as extra coverage while children are young.

It is a weaker fit if you:

• Are healthy and want 20 or 30 years of coverage at a locked price.
• Expect to change jobs, since coverage may end. keeping group life insurance when you leave a job explains what you can keep.
• Are older, where age-band pricing rises sharply.

Questions to ask HR

1. What is the guaranteed-issue amount, and does it apply only in the first 31 or 60 days after hire?
2. What are the rate bands, and can the insurer raise rates for the whole group?
3. Is the coverage portable if I leave, and at what price?
4. Does the benefit reduce at 65 or 70?
5. Are my spouse and children eligible, and in what amounts?

Key takeaways

• Supplemental life is group term coverage you buy yourself, usually without an exam up to a guaranteed amount.
• Premiums rise as you move into higher age bands, so total cost over time can exceed that of a level individual term policy for a healthy buyer.
• Coverage generally ends with your job unless portability or conversion is available, at a higher price.
• It is most valuable when health problems make individual insurance hard to get, or when you need coverage quickly.
• Compare the total cost over the years you need coverage with an individual quote before you rely on it.