The life insurance market offers multiple options to help reduce the financial impact of a death on the deceased’s surviving family members. Some of the most prevalent options include term and whole life insurance purchased directly through an insurance provider.
In some cases, however, workers may be able to opt-in to life insurance plans offered by their employers. Known as voluntary life insurance, these plans may offer a way for staff to increase their overall coverage while keeping their total insurance spending relatively low. As a result, voluntary life insurance plans may be worth exploring — but it’s worth knowing how they stack up against other options before you make a decision.
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What Is Voluntary Life Insurance?
Voluntary life insurance is a type of coverage offered by employers, that their employees opt in to and pay a monthly premium for. That premium is automatically deducted from workers’ paychecks. Those monthly payments are then used to fund either coverage as part of group term or whole life coverage.
For example, an employer participating in a group insurance plan might offer voluntary term life insurance to employees. This is life insurance that remains in effect for a fixed period, such as 10 or 20 years, and pays out if death occurs during this time. Employees with physically demanding jobs or those that work long hours might want to consider this option to provide additional coverage during their time at the company.
The Importance of Life Insurance
Life insurance offers a way to help pay for the costs associated with dying, such as end-of-life care (in some cases) and funerals, and can help reduce the financial burden on family members left behind. Consider that in 2021, the average cost of dying in the United States reached $19,566, including funeral costs and medical care, putting a substantial burden on households that may not have surplus savings.
Life insurance helps bridge this gap, but according to recent data, more than 100 million Americans lack adequate coverage. In part, this stems from affordability; if the monthly costs of life insurance are out of reach given current incomes, families may simply choose to do without coverage. Voluntary life insurance offers a way for employees to either top up their current coverage or access coverage they couldn’t previously afford.
How Does Voluntary Life Insurance Work?
Much like standard term or whole life insurance, voluntary life insurance offers a death benefit to designated beneficiaries in the amount specified by the life insurance policy. Monthly premium payments keep policies active and current, while failure to make monthly payments may result in policy termination.
There are several notable differences, however. First, voluntary life insurance is offered through employers under a group insurance plan. The costs of voluntary life insurance may be lower than traditional insurance, given the ability of insurance companies to access a guaranteed pool of policyholders. In addition, employers may subsidize some of the premium costs of voluntary life insurance as part of employee benefit packages.
Premium payments differ, as well. Unlike traditional coverage, premiums may be taken directly from employee paychecks, reducing the stress around ensuring payments are made monthly. Finally, many voluntary plans do not require a medical exam. While health questionnaires are common, medical exams do not allow staff easier access to coverage.
Voluntary Life Insurance Policy Type Options
Voluntary life insurance generally falls into the two most common types of coverage: term and whole life. The differences between how these plans operate within a voluntary life insurance scheme are generally dictated by their inherent differences. Read on to learn a little bit more.
Voluntary Term Life Insurance
Employee voluntary term life insurance offers death benefit coverage for a set period. This may be 5, 10, 20, or even 30 years, depending on the individual’s health, the work they do, and the amount of coverage offered. For example, a healthy employee who works a relatively low-stress job may pay less for 20 years’ worth of coverage than a staff member in less-than-ideal health whose job includes physical labor.
Term life insurance coverage terminates at a specific end date, otherwise referred to as the end of the term. However, it can be, and often is, renewed for groups. Because term life is valid for finite periods and features fewer benefits to the policyholder, term life usually has cheaper premiums than whole life coverage.
Voluntary Whole Life Insurance
Voluntary whole life insurance provides coverage that lasts an employee’s entire lifetime, but this comes with higher costs. Depending on the provider and the amount and benefits of the coverage purchased, these costs could be five to ten times higher than term life options.
Along with lifetime coverage, whole life insurance also includes the benefit of fixed premiums. Unless employees choose to leave the plan or are compelled to leave or change due to employment changes, premiums remain the same. Additionally, whole life insurance policies include a tax-deferred cash value account that accrues interest over time. These savings function as an investment savings account, and money can be withdrawn at the policyholder’s discretion under many circumstances.
How It Differs From Group Life Insurance
Basic group life insurance plans offer a small amount of coverage to group plan members. In some cases, this coverage is as low as $25,000. In others, it may be several times an employee’s annual salary. Employees may offer automatic enrollment in group life insurance plans for employees, providing a small amount of life insurance at no cost to staff.
Medical exams and questionnaires may not be required for basic coverage. Instead, employees simply fill out a form opting for coverage and designate a beneficiary.
While voluntary life insurance plans may not require a medical exam, other eligibility criteria exist.
First, you need to complete a medical questionnaire that asks for information about employees’ medical and health history. For example, there may be questions about current health, pre-existing conditions, and any life habits, such as smoking or other behaviors, that could increase an employee’s risk of death.
Honesty on these forms is paramount. If staff aren’t entirely truthful about their current health or any conditions they experience, benefits could be denied when insurance companies assess claims and discover inconsistencies. Further, it is illegal, and you could be charged with insurance fraud.
In addition, voluntary life insurance is available to current employees under group benefit plans. Former staff members are not eligible, and there may be a waiting period of up to 3 months before approved coverage activates. Voluntary life insurance plans are not available on public insurance marketplaces.
Coverages and Death Benefits
Voluntary life plans typically offer several death benefit levels but lack the customization found in private insurance plans. This is because they are part of subsidized group benefits. Insurance providers benefit by offering a set of standard policy coverage options to a large group of policyholders, while employers and employees benefit from lower total costs.
In some cases, employees may be able to request additional coverage in exchange for a higher premium cost, but this may also require a more standard underwriting process. This process may include completing a medical exam or giving the insurance company permission to access medical records to determine eligibility.
How Much Does Employee Voluntary Life Insurance Cost?
The typical costs for joining a voluntary life insurance plan vary by the type of insurance and the amount of subsidization (if any) that employers offer. In addition, the coverage amounts impact policy premiums.
Employee health questionnaires may also impact the amount of coverage offered. For example, older staff with pre-existing conditions may pay more each month than their younger, healthier counterparts. Remember that coverage is not guaranteed. Insurance companies may deny coverage if a questionnaire reveals serious medical issues that could lead to premature death.
Compared to standard life insurance, voluntary life insurance is less expensive. The difference in cost depends on how much coverage is offered by insurance companies and whether employers cover any premium costs.
There are potential tax considerations around purchasing voluntary life insurance policies.
The first thing to note is that voluntary life insurance premiums are paid pre-tax. This means premiums come out before taxes are taken, lowering an employee’s income tax liability.
Death benefits, meanwhile, are taxable over a certain amount. If employees have $50,000 or less in voluntary coverage through their employer, the benefit isn’t taxed. Any amount over $50,000, however, is subject to income taxes.
Taxes may also apply to cash value policies. These policies allow policyholders to access benefits before they die in the form of a withdrawal or loan and are usually a feature of whole life coverage. While the policy’s cash value typically grows tax-free, it may be treated as taxable income once it is withdrawn from the account.
How to Get Voluntary Life Insurance
While different employers may have different processes for enrolling in voluntary life insurance, the general steps remain the same: look over coverage options, consider your coverage needs, follow instructions for enrollment, and confirm your enrollment.
1. Look Over Your Employer’s Options
The first step is checking out the available options. Depending on your employer’s insurance provider, there may be several ways to access these options. In some cases, insurers may provide a set of physical documents that describe policy options. These documents are often available from HR departments upon request.
In other cases, policy options may be available online via the insurer’s website. Employers may have a group account login that allows employees to look over coverage options and find policies that work for them. You may also be able to contact the provider directly and ask for a personalized quote.
2. Calculate How Much Coverage You Need
The ideal coverage amount varies depending on your circumstances. For example, employees with robust private insurance policies outside their workplace may opt for basic employer-provided group coverage. In contrast, those who have had trouble securing more traditional policies may choose to purchase additional coverage.
If voluntary life insurance is your primary source of coverage, a good rule of thumb is to purchase coverage equal to 10 times your annual salary.
Consider Adding Riders
You may also have the option to add riders. Riders are optional benefits that impact how coverage works. Popular life insurance riders include accidental death, family income, and accelerated death benefit.
- Accidental death riders provide coverage if death occurs due to an accident rather than natural causes.
- Family income riders offer a specified amount of income to family members over a set period of years.
- Accelerated death benefit riders allow policyholders to access death benefits if they are diagnosed with a terminal illness.
3. Follow Your Employer’s Instructions for Enrollment
When it comes time to apply, employers may ask employees to complete paper forms or access online applications. You’ll typically apply during onboarding, with a potential delay of up to 90 days before coverage starts. Medical exams are generally not part of the voluntary insurance application process.
4. Receive Confirmation of Your Coverage
Some insurance companies may mandate a coverage delay, while others may start immediately. Regardless of specific policies, you should get confirmation of your coverage via physical documents in the mail or via digital documents that you can access via email or employer portals.
What Happens When You Need to End Your Coverage or Employment?
If your employment is terminated or you choose to leave your job, coverage may not come with you. In general, employees have two options: canceling coverage or making it portable.
Depending on the insurance provider, canceling coverage may be the only option if you change jobs. In the case of term coverage, the death benefit disappears when you stop paying your premiums. In the case of whole life, you may lose any cash value currently in your insurance accounts.
Making Your Coverage Portable
It may also be possible to convert voluntary policies into individual policies with the same insurer. If this option is offered, your premium may increase, and you may have to take a medical exam.
If employees take no action, voluntary coverage typically lapses after a month.
Standard Life Insurance vs. Voluntary Life Insurance
Voluntary life insurance offers some benefits and some drawbacks compared to standard life insurance.
Voluntary Life Insurance
Term Life Insurance
Whole Life Insurance
Dependent on employment
Set term length, usually 10-30 years
Taxable over $50,000
Taxable on earned interest
Medical Exam Required
Depends on the provider
Dependant on type – term no, whole yes
Advantages of Voluntary Life Insurance
Advantages of voluntary life insurance include lower premiums and the option to access coverage without a medical exam. Both of these benefits stem from the group nature of this insurance, insurers benefit from larger policyholder pools, and employees benefit from lower costs and easier access.
Drawbacks of Voluntary Life Insurance
Drawbacks of voluntary life insurance include limited coverage options and, in some cases, the inability to take policies to another job. While converting policies to standard term insurance may be possible, this comes at an additional cost.
Is Voluntary Life Insurance Right for You?
Voluntary life insurance is often called supplementary insurance, and it is a better option if you view it that way.
Voluntary policies are an excellent way to access coverage that helps ease the financial burden of death on family members. However, the limited number of policy options offered and the uncertainty of continuing coverage means these policies provide limited value as the primary source of life insurance coverage.
However, these policies, used as supplementary benefits, make it possible to layer on additional coverage at a lower cost and without the need for a medical exam. Combined with employer-provided basic group coverage, voluntary policies are helpful as a backstop for existing individual coverage.
Putting It All Together
Voluntary life insurance allows employees to access additional coverage at a lower cost than comparable individual policies without needing a medical exam.
This type of insurance isn’t for everyone. Employees with substantial individual coverage or who plan to change jobs soon may not get the same benefit from these plans as staff members who have been unable to secure more traditional policies. As a way to bolster existing coverage and provide increased peace of mind, however, it may be worth opting into voluntary plans.