In this post, I’ll explain how supplemental insurance works and how most people go about getting it.
Supplemental insurance is unnecessary for most people. Health insurance, life insurance and disability insurance are more important. If you don’t have the coverage you need there, go and get it before you consider buying supplemental insurance.
Supplemental insurance complements or enhances your primary personal insurance. It’s supposed to fill in coverage gaps that may exist between your life, health and disability policies.
There are many different types of supplemental insurance, but they all have limited uses. If you get injured and you can't work temporarily, supplemental insurance could help you pay bills, for example. There are also supplemental insurance products for specific medical conditions and to pay your final expenses.
Private policies exist, but you typically buy supplemental insurance through your job.
Money expert Clark Howard says stop, do not pass go and do not collect $200 before taking inventory of your current insurance coverage.
Do you have life, health and disability insurance? If not, take a hard look at those first.
“And if you have the ‘Big Three,’ buying something that’s a narrow-purpose insurance policy is really not a priority,” Clark says. “What I always say is go wide with insurance, never narrow.”
Most types of supplemental insurance are inexpensive but limited in scope and coverage amount. Clark says supplemental insurance is not a scam or rip-off, but that it’s “a very, very low priority in your life” and that you should “have everything else in your life in place” before buying it.
Clark laments that few people who need life and disability insurance have it. Too many people have whatever they can get through their employers and don't take steps to buy adequate coverage on their own. That purchasing behavior helps explain why the workplace is such a successful sales channel for companies like Aflac that sell supplemental insurance.
It’s often an emotional purchase. For example, cancer can be so devastating that thinking about it tugs at most people’s heartstrings. A good workplace salesperson often can convince people to buy cancer insurance.
Purchasing supplemental insurance can sometimes make sense. Even if you have health insurance to pay the medical bills, supplemental insurance can help protect against lost income, child care expenses and other unforeseen short-term costs.
Just make sure you understand what the insurance you’re purchasing actually covers and that you already have the more important types of insurance.
I won’t go into detail breaking down every type of supplemental life insurance policy in this article, because I don’t want to put you to sleep. But as I mentioned, this category of insurance is designed to supplement the health, life and disability insurance coverage you already have.
These are the main types of supplemental insurance:
- Critical illness
- Final expense
- Hospital indemnity
- Short-term disability
- Term life
- Whole life
It’s difficult to provide concrete price ranges for supplemental insurance for several reasons.
Not only are there are many different types of supplemental insurance, the variables, including coverage amounts, your medical history, overall health and whether you’re buying through work on a group plan, all affect the cost of premiums.
I reached out to Aflac, a clear leader in the supplemental insurance space, in an attempt to get some cost estimates, but the company didn't return my calls.
However, based on my research of several outside sources, these seem to be reasonable premium ranges for most people for some specific supplemental insurance products.
- Cancer: $20 to $40 per month
- Dental: $20 to $40 per month
- Dismemberment: $5 to $10 per month
- Final expense: $50 to $150 per month
- Medigap: $100 to $200 per month
- Short-term disability: 1% to 3% of your gross annual income
- Vision: $5 to $20 per month
As with any purchase, it’s always a good idea to do your homework. Here are a few things to think about before you buy supplemental life insurance:
- Read the details of your primary insurance polic(ies). If you get basic life insurance through work, it may not be portable if you leave the company. Supplemental insurance is usually something you can take with you. Also, your primary health insurance policy may already offer coverage for something like cancer, negating the usefulness of cancer insurance.
- Think about your overall budget. Remember, Clark says supplemental insurance is a very low priority item. If you're thinking about buying it, make sure that there aren't any higher-priority items that you need to buy first, whether that's life, health or disability insurance or something else entirely.
- Know what you're buying. It's critical to understand what you're paying for. You may assume dental insurance will cover anything to do with your teeth or that critical illness insurance will cover you against any sort of catastrophic disease. But most supplemental insurance policies are limited in scope — sometimes extremely limited.
- Understand how the market views you. If you have pre-existing conditions, supplemental insurance through work (supplemental life insurance, for example) may be a way for you to get affordable coverage that you couldn't get otherwise. If you're young and healthy, you may be able to get better rates for any type of insurance by purchasing it on your own rather than through your employer.
If you’re considering supplemental insurance, you should ask yourself two questions: Do I have the “Big Three”? And why am I interested in supplemental?
It’s important to get good health, life and long-term disability insurance before anything else. Although supplemental insurance isn’t a scam and typically isn’t that expensive, you shouldn’t buy it based on an emotional response or because someone sells you on it at work.
And in many cases, the limited scope of supplemental insurance policies mean they end up not being useful or are redundant to your regular coverage.
Injuries or illnesses can cause temporary financial challenges. It’s probably better to build a good emergency fund to protect yourself against that (and a host of other things like car trouble). Building those funds is going to be more difficult if you’re spending extra money on supplemental insurance.