You probably already know that many employers offer health insurance as one of their key benefits, but did you know that many employers also offer life insurance?
There are a variety of different potential life insurance options that your employer might offer, but voluntary life insurance is among the most common. This is a policy that you pay into and that pays out to your chosen beneficiaries, rather than a policy that your employer might take out on you.
In this article, you will find a complete overview of voluntary life insurance and what it entails, its benefits and disadvantages, and the things to consider when deciding whether to take out this type of policy through your employer.
What Is Voluntary Life Insurance?
Voluntary life insurance is an optional life insurance plan offered by some employers. It is like any standard life insurance policy, in that the policyholder (the employee rather than the employer), pays monthly premiums in order to secure a financial payout to their chosen beneficiaries when they die.
Unlike other types of life insurance that an employer may take out on key employees, the employer will not usually receive anything on the death of the policyholder, unless the employee chooses to name their employer as their beneficiary for some reason.
Voluntary life insurance is very similar to basic life insurance, with the only difference being that it is a voluntary benefit, rather than a compulsory one. Employees may choose to take advantage of the policy, to seek life insurance elsewhere, or skip life insurance if they do not feel like it is necessary for their circumstances.
Voluntary life insurance plans will usually have lower premiums than basic life insurance plans, because the employer is usually able to negotiate better terms with the insurance company as they are representing multiple policyholders. They may also have various other policies with the insurance provider, such as employee health insurance, affording them stronger bargaining power.
Premiums are usually taken directly out of your salary, and may not be included in your taxable income, which again improves the affordability of the policy.
However, the terms and conditions of voluntary life insurance policies tend to be more restricted than an independent policy. There are usually limits on the size of the death benefit that you can secure from your policy, you may not be able to choose between a whole or term life insurance, and you may or may not be able to take the policy with you if you terminate your employment.
Let’s take a look at these details.
If you are a business owner looking for life insurance advice, read: Best Life Insurance for Business Owners.
Conditions Of Voluntary Life Insurance
Employers may offer either whole or term life insurance as part of their voluntary life insurance options.
Whole Voluntary Life Insurance
Whole life insurance is a policy type that covers you until you die. You must also pay your premiums for your whole life. If you stop making payments, the policy lapses, and you lose your investment.
If your employer is offering whole life insurance as part of their voluntary life insurance offerings, it will almost certainly include portability options that allow you to continue the insurance policy even after you leave your employer.
Whole life insurance policies will be more expensive than term life insurance policies offered through your employer.
Term Voluntary Life Insurance
Term life insurance is a policy that you pay in for a fixed term: for example, over 10, 20, or 30 years. The policy only pays out if you die within the duration of the policy. If you outlive your policy, your death benefit is retained by the insurance company.
As there is a risk to you that your beneficiaries may receive nothing from your policy, premiums tend to be considerably lower on term life insurance policies.
Term policies may also contain a portability clause that allows you to retain the insurance policy if you retire or change employers.
The key benefit of voluntary life insurance is that it tends to be much cheaper than securing a life insurance policy independently. An employer representing multiple potential policyholders will be able to negotiate a better deal. Rates on voluntary life insurance policies tend to be between 10 and 20 percent lower than if you were to take out the same policy independently.
Another important potential benefit of voluntary life insurance is that limited underwriting is required. This means that this type of life insurance can be more accessible and affordable for individuals with health conditions that might otherwise struggle to find affordable life insurance.
However, you can expect both of these benefits to be depleted if you want your voluntary life insurance policy to include a portability clause that allows you to take the policy with you after you terminate your contract with your employer.
This will usually push premiums up a noticeable amount, and you may be required to provide proof of your current healthy condition in order to secure this rider to the policy.
The main disadvantage of a voluntary life insurance policy is that it lacks flexibility. Because the employer is negotiating policies for a group of individuals, they may need to agree to a standard set of terms of conditions that it is not always easy for you to modify.
Any modifications usually involve additional expense, which can undermine the savings that you get from acquiring this type of policy in the first place.
For example, your employer may negotiate a clause in their group of life insurance policies that allows for policyholders to access the money from their policy while still alive if they are diagnosed as terminally ill.
If this is something that you don’t want but it has been negotiated for the group, you are probably paying for it anyway with slightly higher premiums. The alternative would be likely needing to pay quite a bit more to secure the rider for yourself.
The other major disadvantage of voluntary policies is that there is usually a cap on the amount of money that you can be covered for. And this number tends to be relatively low. So it is important to consider whether the size of the benefit being offered really is sufficient to cover all the things that you are concerned about in the event of your death.
How Much Life Insurance Do I Need?
The amount of life insurance that you need depends on your individual circumstances, but the idea is that you have enough that your loved ones and dependents aren’t hit with big bills when you are gone, and left unable to afford their standard of living due to the loss of your income.
So a death benefit will normally need to cover your immediate end-of-life expenses, such as funeral costs, and perhaps inheritance tax if you are leaving behind a legacy.
You will also want to leave funds to support your dependents. How much they will need depends on their age, their personal income, and so forth.
You may also want to use life insurance to create a legacy. For example, you may have promised to put a child or grandchild through college, and might want to leave a legacy to cover that expense in the event of your death.
So the amount of life insurance that you need varies based on these kinds of circumstances. It can be as little as $10,000 to cover a basic funeral, or millions of dollars to support loved ones for years to come.
Can You Borrow From Voluntary Life Insurance?
It is unlikely that you will be able to borrow against your voluntary life insurance policy. First, it is only possible to borrow against whole life insurance policies, and voluntary policies are often term policies.
Secondly, this is a rider that will need to be negotiated as part of your policy contract. Since your employer will already have negotiated that contract when offering you the voluntary life insurance option, if it is not already included, it will be very challenging to add.
Voluntary life insurance programs run by employers are a great way to get affordable life insurance for a group of people.
Employers are generally able to negotiate much better premiums as they are negotiating on behalf of a significant group of people. They may hold a variety of other policies – such as health insurance policies – with the insurer, which gives them negotiating power.
So, if your employer is offering voluntary life insurance, you may be able to save on premiums, especially if you have a health condition that limits your access to life insurance, as individual health examinations are not normally required.
But remember, that in exchange for this discount, you are sacrificing flexibility. There may be a limit on the sum of the death benefit that you can request, and you may not have access to common insurance options, such as borrowing against your insurance or receiving your death payout early if you are diagnosed with a terminal illness.
You also may or may not be able to continue the policy if you leave your employer or retire, and making your policy portable so that you can take it with you might cost you quite a lot.
So don’t forget to consider these restrictions when considering the savings you can score with a voluntary life insurance policy.
If you are looking for a life insurance provider, check out our article on the Best Life Insurance Companies.