Supplemental insurance | Insurance | Financial literacy | Khan Academy

So let's talk a little bit about supplemental insurance. Now, it is what the words describe it as; it is a supplement to usually some other existing insurance. It's insurance above and beyond things that you might already have.

So there's a lot of examples of supplemental insurance, but they usually try to specify—they usually try to cover specific things that you might worry about. For example, there might be mortgage payoff life insurance. One of the main reasons why, for example, I have life insurance is if something were to happen to me, I want my family to still be able to live in our house and to be able to pay off our mortgage and not worry about where that income is coming in.

So I've gotten enough life insurance to do that. But the insurance companies know that sometimes people worry specifically about that situation, and so people might get that very specific type of life insurance: mortgage payoff life insurance, which you could view as a supplement to traditional life insurance.

Now, if you've got enough life insurance, you should be able to pay your mortgage and then hopefully do other things that your family needs to support them. But this might be a supplement that you look at. But whenever you look at any form of insurance, realize that the insurance company has done the statistics, and they're going to make money off of it.

Now that doesn't mean that you shouldn't do it. Oftentimes it will protect you in a lot of ways, so it is worth doing it. But you should think about whether you need to do it or whether it's already covered by another insurance you have.

Another example is car insurance. You might have comprehensive car insurance already where if the car not only gets in an accident but if it's stolen, if a tree falls on it, the insurance company will pay you the cash value of the car. So if you wanted, you could go and get another used car just like that.

Now some people, if you're not paying off your debt fast enough on your car loan, the cash value of your car might be less than the amount that you owe back on your car. Now that's in general not a good situation—if you're paying back your car loan slower than your car is actually losing value—not a great situation to be in.

But a lot of folks wouldn't want to get money from an insurance company for say, a car got totaled, and it still can't even pay back the total loan available in the car. So they have things like auto loan payoff car insurance, which you could use as a supplement to traditional insurance. But once again, it's not a great situation to be in.

And in theory, even if the insurance company is paying you the cash value, you can go and get an equivalent used car, and even though you owe more money than that, you're kind of in the same situation you were before the accident or whatever the scenario you were in.

But the general principle: supplemental is above and beyond. Maybe you have insurance, dental insurance, or life insurance, or some other type of insurance from your employer, and you're just thinking, "Hey, I would like more insurance. They're not giving me enough." Well, that could be a good reason to get supplemental insurance as well.