- Voluntary life insurance is optional life insurance you can purchase through your employer at a group rate.
- Employers make the insurance available even if you have health issues or other risk factors, making it a more cost-effective option for certain consumers.
- If you’re young and healthy, you may get a better rate by buying a private plan on your own.
- In addition to a death benefit when you die, you can add additional coverage (via a rider), including accelerated benefits and waiver of premiums.
If you’re lucky, your employer offers life insurance, likely up to $50,000 worth of coverage or even as much as 1.5 times your salary.
But is that enough coverage? If you have dependents—like a spouse, children or other family members—who rely on your paycheck for their living expenses, probably not. After all, a rule of thumb says that you should purchase at least 10 times your annual income in life insurance.
Many employers offer their employees the option to purchase additional life insurance coverage and pay the premium themselves. Since this life insurance is optional, it’s known as voluntary life insurance. It’s generally best for people with health issues who work for employers who provide it at an affordable cost.
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The basics of voluntary life insurance
Voluntary life insurance is optional life insurance you can purchase through your employer at a group rate. You’ll pay the premium yourself, but it will typically be more affordable than shopping for a private policy as an individual, since the risk is spread across the employees at your company who are covered. Your company may subsidize the premiums as well.
There are two main types of life insurance: term life and whole life.
Term life insurance
Term life provides coverage for a set amount of years, often between 10 and 30. You time the coverage to end around the time you stop needing it, which for many people is when their children are grown and financially independent. Term life is the best choice for most people, since it’s significantly more affordable than whole life insurance.
Whole life insurance
Whole life lasts for the duration of the insured person’s life. Some policies also have a cash value component. Since death is inevitable for all of us, the insurance is guaranteed to pay out eventually, which is why it’s significantly more expensive than term life insurance.
There are both term life and whole life versions of voluntary life insurance, but most voluntary life insurance is term life insurance.
Who should consider voluntary life insurance?
Life insurance isn’t only offered through employers—you can purchase your own policy directly from an insurance company or with the help of a life insurance agent.
If you’re young and healthy, it may be cheaper for you to go out and get a term life insurance policy on your own than to purchase voluntary life insurance through your employer. The coverage through a private plan may be more extensive, and you won’t run the risk of losing it when you change jobs (more on that later).
However, if it could be difficult for you to get life insurance at a good rate on your own, voluntary life may be your best bet.
“Anybody who has insurability issues should definitely look at voluntary life insurance,” Ben Gurwitz, a Certified Financial Planner at Financial Life Advisors, says. “So if you have a chronic illness or otherwise have trouble getting insurance because of health reasons, you can gain access to coverage you wouldn’t otherwise be able to get, or it would be much more expensive.”
That’s because, with voluntary life insurance, there’s often a guaranteed issue amount when you’re first hired or when a new policy is put in place, Gurwitz says. That’s followed by an open enrollment period when there’s no underwriting required in order to get coverage.
In other words, up to a certain limit, you won’t be turned down for coverage because of health issues or other risk factors.
How much does voluntary life insurance cost?
Many employers offer a certain amount of coverage at no cost to the employee—often a flat dollar amount or a multiple of the employee’s salary. But if you want to add additional coverage, you’ll have to pay for it. This payment typically takes place via payroll deduction.
If the benefit of your employer-paid policy exceeds $50,000, for example, you’ll likely see a line item on your pay stub for the income tax you’ll pay for that coverage.
Companies with 100 employees or more typically have access to competitive rates, Gurwitz says. However, healthy individuals might find a lower-priced option on the open market.
For example, at one employer, Berklee in Massachusetts, employees pay per $1,000 of extra coverage above what the college provides for free. How much you’ll pay per $1,000 depends on your age. A 46-year-old who wants to purchase $100,000 in voluntary life insurance coverage will pay about $14 per month for it.
Can you take voluntary life insurance coverage with you when switching jobs?
With any benefit that’s tied to your employer, you should ask: What happens when I leave the company?
For example, with a 401(k) plan, you have a few options: You can leave it with your former employer’s provider (but you can’t contribute to it once you leave), or you can roll it over to your new employer’s 401(k) or to an IRA.
Your health insurance, on the other hand, will typically end within 30 days of your last day, though you may be able to continue your coverage on your own dime through COBRA.
Unfortunately, when you leave a company, you don’t get to take, or “port,” your voluntary term life insurance with you, at least in its current state.
“One of the downsides of voluntary life insurance through an employer is oftentimes you lose that coverage or have to convert it to a really expensive whole life policy to keep it when you leave,” Gurwitz says.
If you find yourself in this situation—leaving your job and having to decide what to do with your voluntary life insurance coverage—you’re probably best off leaving your policy behind to buy a new one, either on your own or through your next employer.
“The conversion to whole life would likely only be a good idea if there was an issue of insurability. The cost of this is generally higher than even purchasing a new whole life policy on someone who is healthy,” Gurwitz says. “Life insurance companies know that most people will not convert a policy but people who do convert to whole likely can’t get it elsewhere.”
Common forms of additional voluntary life insurance coverage
In addition to typical life insurance coverage, when a beneficiary receives a tax-free, lump-sum payment of a policy’s death benefit, you can often add a “rider,” or additional coverage and benefits.
Accelerated benefits rider
When you purchase this type of rider, rather than your beneficiary receiving all of your death benefit after your pass away, you can receive a portion of the money during your lifetime. This rider is limited to those dealing with terminal or chronic illness.
Waiver of premium rider
In cases of becoming ill or injured and unable to work as a result, you can continue your life insurance coverage while effectively pausing your premium payments.
Voluntary accidental death and dismemberment (AD&D) coverage
This product isn’t a rider per se, but a different type of insurance coverage that can complement your voluntary life insurance. AD&D provides a lump-sum payout if you’re in an unexpected accident that results in your death or loss of limbs, senses or mobility.
How to determine whether you need voluntary life insurance
If you feel a bit overwhelmed by the prospect of shopping around for a life insurance policy and don’t need a ton of coverage at this point in your life, voluntary life insurance could be a good place to start.
“By making voluntary life insurance easy to enroll in when you sign up for benefits, it potentially encourages people to get life insurance that otherwise wouldn’t,” Gurwitz says. There are lots of people who should have insurance but don’t because they don’t know where to shop, he adds.
Even though voluntary life insurance is readily available from your employer, you should still take the time to ensure this coverage is worth your while. Here are a few scenarios where it might or might not make sense:
If you’d like a bit more coverage without increasing the premium on your individual policy, Gurwitz says that purchasing voluntary life insurance can be an affordable way to supplement an existing policy.
If you’ve done a bit of shopping around and found that life insurance isn’t affordable for you because of health issues or other factors, you’re a great candidate for voluntary life, which allows you to purchase life insurance at a competitive rate without a health exam.
If you have a life insurance policy directly through an insurance company with a coverage amount and premium you feel comfortable with, you may not need voluntary life insurance. (Here’s how to figure out how much life insurance you need.)
Whether you opt for an individual policy, voluntary life insurance through your employer or a combination of both, you can breathe easier knowing that your loved ones will be taken care of financially if you were to pass away.