What Are Supplemental Life Insurance Options?

Posted in Life Insurance

February 10th, 2010

Obtaining life insurance offers huge benefits, including the security of knowing that once you’ve passed on you can leave your family with financial stability. Recent studies show that life insurance is such an important asset that consumers have been willing to purchase or maintain their coverage despite the recession.

But what many policyholders don’t know is that there are supplemental life insurance options available that can enhance the existing policy. Of course, not all options are necessary, so before diving in and purchasing some, it’s good to know what’s out there to help you determine whether it’s needed.

Why Add Supplemental Insurance Options?

Many customers choose to add supplemental insurance options to their policies because they’ve purchased term life insurance. If you’re familiar with the permanent vs. term life insurance then you’ll know that term insurance is much cheaper because it allows you to maintain a policy only during a specific period of time.

For instance, if you purchase a 10-year term policy, you will only be covered if you die during the 10-year period. If something happens after that, you will no longer be covered. Also, it typically offers no additional benefits.

Permanent insurance, on the other hand, covers you for life as long as you make your premium payments. And while it’s usually much more expensive, it offers additional benefits including having some of your premium invested to create a reserve fund for you and maybe even being able to borrow against or cash out your reserves down the line.

Because so many people elect to purchase term insurance, they often add on supplement insurance options to help beef up their policies without having to pay as much as they would with a permanent policy. However, those with permanent policies (whole and universal) do purchase supplemental insurance options as well.

Breakdown of Supplemental Insurance Options and Costs

When purchasing life insurance, the costs can vary drastically depending on the company you work with, how old you are, whether you smoke and much more. However, just to get an idea of the benefit that you could receive for adding the supplemental options, let’s look at an example.

Consider that a 36-year-old single woman who doesn’t smoke, 5′ 4″, 140 pounds, wants a 10-year term life insurance policy with $500,000 coverage amount. Getting an average of quotes across the Internet, the one-year policy would cost $365 with a $32 monthly payment.

This means, upon this woman’s death, her beneficiary would receive $500,000 – as long as the death is within the 10-year term.

However, she’s decided to add on some supplements (also known as riders) to her policy. Here are the supplements she had to choose from:

1. Accidental Death Supplement (avg. $10/month): This benefit (also known as double indemnity) pays twice the death benefit if the death was caused by some type accident as opposed to complications related to old age.
2. Disability Waiver Premium ($4.17/month): This benefit pays your life insurance premiums if you become disabled and can’t work. The average cost for adding this rider depends on the age of the policyholder. In this case, the cost averages $0.10 per $1,000 in coverage for a 36-year-old. With a $500,000 policy, the annual cost would be $50 or $4.17 per month.
3. Accelerated Death Benefit (avg. $5/month): This rider allows you to collect all or a portion of your life insurance policy while you’re still alive. You may be able to claim it if you’re diagnosed with a terminal illness or require long-term care or admission to a nursing home and are unable to work. It’s good to note that some companies don’t charge for the rider upfront and instead add a cost when the benefit is paid.
4. Children’s Protection ($2/month): This benefit helps you cover your children in the unfortunate event that something happens to them. The cost for this coverage can run as low as $1 per month.
5. Family Income Benefit Rider (avg. $25/month): This rider guarantees that family will continue receiving the policyholder’s monthly income upon death.

Looking over her options, there is no need to purchase Children’s Protection or the Family Income Benefit because she doesn’t have a family. The Accidental Death Supplement won’t be necessary because the $500,000 policy will more than cover her final costs.

However, being on her own, the Disability Waiver Premium and Accelerated Death Benefits would help tremendously if she were injured and unable to work. These costs add her monthly premium amount to $41.17 per month or $494.04 per year.

If 60 months into her policy, she was injured in a car accident that left her unable to work for two years, the Disability Waiver Premium, for which she would have paid a total of $250.20 would have been paid back in six months and the Disability Waiver Premium that cost $300 would have been immediately worth the cost.

Of course, when choosing whether to add supplemental insurance options, you want to analyze whether you truly have a need for them. However, if you think you might, you see that the few extra dollars added on each month could make the difference between leaving you or your family in debt upon a tragedy occurring.