Life insurance is a contract between you and an insurance company. But more than that, it provides security to your family in the event of your death, making sure you can take care of your loved ones even when you can’t be there for them physically.
Life insurance coverage comes in both term, whole, universal, and supplemental policies, and it’s not always easy to tell them apart. In this blog, we’ll focus specifically on the difference between term and supplemental life insurance so you can understand how to choose the coverage that’s right for you.
Supplemental vs. Term Life Insurance
There are two main types of life insurance: term and supplemental. In short, term insurance protects against death only for a predetermined amount of time (hence its name). Because it doesn’t build up cash value, it typically has a much lower premium than other policies. For this reason, you may hear term life insurance referred to as the more inexpensive type of life insurance.
Supplemental life insurance is meant to be an addition to your family’s existing health insurance policy. It may also be purchased alone as an independent policy. Supplemental life insurance builds up cash value and pays out either if you die during its period of coverage or if you live past that date but become severely disabled.
We’ll explore the differences between term and supplemental life insurance in greater detail below.
What is Term Life Insurance?
Term life insurance is meant to pay out a death benefit if you pass away during a period called your term. For example, if you have 20-year term life insurance that runs from age 25 to age 45, it means that if you die between ages 25 and 45, then your beneficiaries will be paid out accordingly from the policy.
Term is generally a less expensive option than whole life or universal life insurance (more on these types of life insurance towards the end of this blog) because it doesn’t offer cash value. This means there isn’t any kind of savings account attached to it with which you can invest and build equity over time. Term life insurance only pays out on death, and that’s its sole purpose.
The Pros of Term Life Insurance
Since a term life insurance policy is designed to provide coverage for a set period, such as 20 or 30 years, it’s a go-to for many people starting with a life insurance policy. Though it doesn’t have the long-term wealth-building element; beneficiaries will often receive larger death payouts with a term life insurance policy than some other forms of coverage (if you were to pass away within the specified term).
The Cons of Term Life Insurance
Even though term life insurance premiums are usually relatively low, factors such as whether you are a smoker or non-smoker, your age, and any pre-existing health conditions are all taken into consideration. You also have to re-qualify at the end of the term, usually by taking what is called a life insurance exam.
Again, since term life insurance only covers a fixed period, beneficiaries will not receive any death benefit if they pass away outside of the policy’s coverage.
Term life insurance policies are also less flexible than other policies. The term of coverage and death benefit are typically set in stone, with no option to increase premiums should you later decide to do so. Also, since there is no possibility of building wealth with term life insurance, the very idea of paying 20 years of premiums just to outlive the policy and see it expire can seem like a waste.
Is Term Life Insurance a Good Investment?
Some may look negatively upon term life insurance, as it doesn’t possess the same long-term wealth-building benefits of whole or universal. But many financial professionals still see term life insurance as a smart long-term choice for financially-focused individuals.
Is term life insurance good for the elderly? Is term life insurance good for couples? Is term life insurance a good idea for a retiree? It absolutely can be! Throughout the long history of life insurance, term life insurance has proven beneficial for many people, and it may be the right choice for you, depending on your goals and life circumstances.
Ensuring you have life insurance is paramount. From there, you shouldn’t feel any pressure to choose a certain type of plan. Speaking to caring professionals in the insurance and risk management space who can help you understand the differences between term and supplemental life insurance and determine and decide what’s right for you – regardless of the type – is the most important part.
What is Supplemental Life Insurance Used For?
Supplemental life insurance adds protection to an existing life insurance plan and fills in the gaps of your pre-existing policy. It’s important to remember that supplemental insurance differs from term, whole, or universal insurance which can be used on their own.
The logic behind this is that it allows you to supplement (hence its name) your coverage while also offering additional death benefits, should you live longer than expected. The amount of money you pay into supplemental life insurance is dependent upon several factors, with age, health, sex, and lifestyle having the greatest impact.
However, two constants exist across all kinds of supplemental policies: (1) they typically come with a shorter duration and are typically guaranteed renewable, and (2) they allow policyholders to adjust their coverage without penalty at renewal periods over their lifetime.
The Pros of Supplemental Life Insurance
Is supplemental life insurance worth it? It certainly can be. There are two main reasons why someone may choose supplemental life insurance in addition to a preexisting plan. First, it offers an additional layer of coverage to an existing policy, maximizing coverage for your family. The benefits of this type of coverage include:
- Supplemental spouse life insurance
- Supplemental child life insurance
- Coverage if you’re seriously hurt or killed in an accident
The second reason is that supplemental policies usually have the option of riders, meaning they offer more flexibility in what they cover. In some supplemental life insurance plans, you have the option to add coverage in the event of accidental death. Accidental death and dismemberment insurance can help a family when they experience a sudden and unexpected loss to a primary household provider.
Also, with term insurance, once you pay your premiums for a certain period, your policy expires. With a rider, there are various options to continue paying into your policy on an annual basis and extend its coverage period up to age 100+.
The Cons of Supplemental Life Insurance
Supplemental life insurance isn’t permanent. Once you stop paying your premiums, your supplemental life insurance coverage stops too. If that happens before you die, your beneficiaries may be left with very little if they depend on it for income or payments from a debt relief program, such as consolidation or bankruptcy.
Supplemental life insurance isn’t designed to be a substitute for permanent life insurance; it’s meant to be something you need on top of an existing policy. In this way, the differences between term and supplemental life insurance can work together. You may have a term life insurance policy and choose to add a supplemental life insurance policy on top for its additional benefits or peace of mind.
What About Whole or Universal Life Insurance?
Whole and universal life insurance both fall into the categories of permanent life insurance. Whole life insurance offers consistency with fixed premiums and guaranteed cash value accumulation. Universal life insurance gives policyholders flexibility in premium payments, death benefits, and the savings element of their policies.
While both have their pros and cons, they are generally a good choice for people looking to maximize coverage and build long-term wealth through life insurance.
How to Choose What’s Right for You
Once you’ve decided you want to purchase life insurance, start by figuring out your needs. An easy way to begin is by thinking about your current income and expenses and then projecting what they will be in the future. Do you want to start a family? Are you planning on incurring additional debt, such as student loans for your children? Looking to buy that vacation home you’ve always wanted?
A useful rule of thumb is to calculate life insurance equal to 10 times your annual income. This should give your loved ones enough time to adjust their finances after paying off existing debt, saving for retirement, and taking care of any other financial obligations before having to tap into whatever savings or investments may remain.
Which Type of Life Insurance is Right for Me?
The question here should really focus on what type of life insurance is best for you right now. By taking into consideration your age, marital and family status, income, and health, you can get a better idea of the best type of life insurance for you at any given stage of life.
While you may find yourself opting for a different type of coverage at a stage in life that differs from the list below, a typical life insurance strategy may look something like this:
- Term life insurance. This type of coverage is best for single or married adults with no children on a budget.
- Whole life insurance. This type of coverage is usually best for young families and parents looking to invest in their child’s future.
- Guaranteed issue life insurance. This type of coverage is best for older adults who don’t plan to outlive their coverage.
As we covered earlier, the main difference between term and supplemental life insurance is that the latter is an add-on to an existing policy. Depending on your current circumstances and what you’re looking for in coverage, supplemental life insurance could be a great addition to any of the above policy types.
Yes, You Should Have Life Insurance
Life insurance is important no matter your age, but according to experts, most people should buy life insurance by age 25. However, it can be beneficial as early as 18 years old in some cases, depending on a variety of factors (for example, whether or not you have children).
Life insurance exists to help protect those who depend on you financially. If you’re looking for a simple way to make sure your family is taken care of in case something happens to you, then life insurance will do just that.
Remember, every person and every situation is different. No matter how much you read about the difference between term and supplemental life insurance (or any insurance) online, nothing beats talking to a professional who can help you find the best policy for you and your family.