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Voluntary life insurance: What is it & should I get it?

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Along with retirement plans and group disability insurance, voluntary life insurance is an employee benefit many employers offer to their employees. Through a voluntary life plan at work, employees can purchase life insurance coverage for themselves, and typically their spouse and children.

What is voluntary life insurance?

Voluntary life insurance is also known as “eligible employee” life insurance because there are eligibility requirements for an employee to participate, such as requiring an employee to work over 30 hours per week. Employees can purchase coverage in increments of $10,000 or as a multiple of their salary.

There are two types of coverage offered in voluntary life insurance plans: voluntary term life and voluntary permanent life. Let’s take a closer look at both, along with the various benefits and riders these plans offer, and who should participate in them if possible.

Voluntary term life insurance

Voluntary term life insurance is the most common type of voluntary life insurance offered to employees. With term life insurance, the employee is covered for a specific term (1, 5, 10, or 20 years), at which time the employee can either cancel or renew the policy.

The premiums for voluntary term life are based on your age. They will increase each year or when you enter a new age bracket, such as 36-40 years of age. The premiums for voluntary term life are generally less expensive than voluntary permanent life insurance because term life insurance doesn’t have a savings, or cash value, component as part of the policy.

A voluntary term life policy can also include coverage for a spouse and children, but one parent usually has to be covered for children to be eligible to participate.

Learn More: Term Life Insurance

Voluntary permanent life insurance

Though not offered as often as voluntary term life insurance, voluntary permanent life insurance is well received because it offers three benefits to the employee:

  1. Premiums won’t increase for as long as the employee has the coverage
  2. The employee can keep the coverage for their entire life (not a specified term)
  3. The policy will build “cash value” as savings available to the employee

An employee’s spouse and children can also be covered for their entire lives, but the payout amount will be smaller.

Employers not offering a retirement plan benefit to their employees often offer permanent life insurance because of the employee’s ability to save money as part of the policy.

Learn More: Permanent Life Insurance

Benefits & riders of voluntary life insurance

Insurance companies will offer riders and added benefits to voluntary life insurance plans, some at an added cost to the employee. They include:

  • Convertibility: An employee can convert a term life policy to a permanent life policy, sometimes without providing evidence of being insurable to the life insurance company.
  • Portability: This allows an employee to keep their voluntary life insurance policy after leaving an employer, even if that employer terminates them.
  • Accelerated death benefit: If the employee becomes ill and is diagnosed as having two years or less to live, a percentage of the death benefit can be paid in advance, with the remainder being paid to the policy’s beneficiaries when the insured passes away.
  • Spouse and dependent coverage
  • Payroll deduction: premiums are deducted directly from the employee’s wages

The structure of a voluntary life insurance policy

There are four components of a voluntary life insurance policy: death benefit, premiums, cash value, and beneficiary.

  1. Death benefit: The death benefit, also known as the payout or face amount, is the amount of money guaranteed to be paid by the insurance company to the employee’s beneficiaries in the event of the policyholder's death.
  2. Premiums: Premiums are the amount of money paid each pay period for the insurance coverage. The insurance company determines the premium amounts for each age bracket.
  3. Cash value: If the voluntary life insurance policy is a permanent life insurance policy, such as whole life insurance, the cash value acts as a savings account that the employee can access during the life of the policy. With certain types of permanent policies, the policyholder can use the cash value to pay premiums.
  4. Beneficiary: This is the entity that the employee names to receive the death benefit when they pass away. The beneficiary can be a person(s), organization, charity, even a business.

Voluntary life insurance vs. basic life insurance

While voluntary life insurance is a benefit that the employee can choose to participate in, basic life insurance is life insurance paid for by the employer for the employee's benefit. It can still be considered “optional,” but most employers pay for basic life insurance up to a certain amount at zero cost to the employee. The base benefit for basic life insurance is typically twice the employee’s salary or a maximum benefit of $50,000.

Should I get voluntary life insurance?

While nearly everyone can benefit from having life insurance coverage, voluntary life insurance is an excellent product for people to own if:

  1. They have pre-existing medical conditions. Voluntary life insurance is guaranteed to be issued, up to a specified face amount, regardless of an employee’s health history. This is very beneficial for people that have been declined for life insurance previously or were offered a policy at substantially higher rates because of pre-existing conditions. Voluntary life doesn’t require applicants to have a medical exam or provide doctor’s records when applying for coverage.
  2. They have no other life insurance. Some employees would like to have life insurance coverage, but they haven’t gotten around to getting an individual policy outside of work. Voluntary life through their employer provides them with the opportunity to protect their loved ones financially if they were to die.
  3. They need to supplement their existing life insurance coverage. An employee might already own an individual life insurance policy, but purchased it years ago. Since then, their personal situation may have changed, such as getting married or having children. Voluntary life through their employer allows them to add more protection at group rates that are often lower than they would get if paid individually.

Even if an employee is happy with the amount of coverage they can get through an employer’s voluntary life insurance plan, they might still want to consider getting life insurance individually, particularly if the employer’s policy isn’t portable. An individual policy might also be a better fit for someone that wants a permanent policy rather than the term life plan their employer is offering.

Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published April 28, 2021
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