Voluntary employee life insurance is a benefit some employers make available to upgrade the basic life insurance the employer provides. Depending on the company, the employer may also offer supplemental voluntary spouse life insurance or coverage for children. Accidental death or dismemberment (AD&D) insurance may also be available.
Voluntary life insurance does not replace traditional term life insurance but can be an affordable way to supplement existing coverage. Coverage amounts are typically small, and you might be unable to take the policy with you if you leave the company. Exploring the pros and cons can help you determine if voluntary employee life and AD&D coverage are for you.
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Key Takeaways
Voluntary life insurance is an employee benefit that can increase basic life insurance coverage. The death benefit goes to the employee’s chosen beneficiary upon the insured’s death.
Although basic life insurance is usually free, employees pay for voluntary life insurance out of their earnings. It’s usually made available soon after hiring and at annual open enrollment.
While group rates make voluntary employee life insurance cheaper than traditional life insurance, it’s not a substitute for individual coverage. Employees may not be able to keep the policy if they leave the company.
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What Is Voluntary Life Insurance?
Voluntary life insurance is a form of group life insurance that provides more coverage than basic life insurance. Although employers often pay for employees’ basic life insurance, voluntary employee life insurance usually isn’t free. The employee pays the premium for voluntary insurance and AD&D insurance, and spouse or child coverage. The premiums are typically automatically deducted from their paycheck.
A voluntary life plan is available in addition to basic life insurance. Optional employee life insurance is usually made available to new hires soon after their hiring date. After that, basic and voluntary life insurance is only available during the company’s open enrollment period once a year.
Basic life insurance is an employee benefit with a face amount that is usually equal to the employee’s annual base income. Some employers pay for the coverage, while others make it available at a low cost. As a free or low-cost option, it can be a good fit for anyone, but like voluntary life insurance, it should not be used as a substitute for individual life insurance.
Types of Voluntary Life Insurance
When voluntary life insurance is made available, there are two types: term life insurance and whole life insurance. Both types have pros and cons, and understanding the differences can help you decide if you should get voluntary life insurance and which type is best for you.
Types of Voluntary Life Insurance
Type | Description |
|---|---|
Voluntary Term Life Insurance | Like traditional term life insurance, voluntary term life insurance offers coverage for a set number of years. Depending on the plan, coverage may renew annually, every five years, or be level for 10 to 30 years. Coverage costs may increase with age, even though the death benefit amount stays the same. Premiums are less expensive than voluntary whole life insurance because coverage is temporary and there is no cash value component to this policy type. |
Voluntary Whole Life Insurance | If you buy voluntary whole life insurance, expect the price to be higher than voluntary term life insurance. This is because, like traditional whole life insurance, voluntary whole life insurance offers lifetime coverage at a fixed rate and builds cash value. Rates will stay the same for the policy's life, as will the death benefit. |
How Does Voluntary Life Insurance Work?
Voluntary life insurance is an optional benefit made available to employees. Employers may offer basic life insurance for free or at a low cost and provide employees with an option to upgrade their coverage at the employee’s expense. The employee can choose to decline the coverage.
Here is how voluntary employee life insurance compares to other types of life insurance.
Related: How Does Life Insurance Work?
Death benefit
Voluntary life insurance may have a coverage limit of up to $100,000, while individual life insurance can be $10 million or more. There may be an option to add an accelerated death benefit rider for terminal illness, which accelerates the death benefit after a terminal diagnosis and less than 12 or 24 months to live, making part of the death benefit available while the insured is still alive. The paid amount will reduce the death benefit paid to the beneficiary.
Eligibility
Employers decide whether to make this insurance benefit available as part of the employee benefits package. There may be restrictions on eligibility, like having to work 30 or more hours per week. Voluntary life insurance is available shortly after an employee is hired and annually during open enrollment. The employee can choose to purchase a voluntary life plan at their own expense or decline coverage.
Cost
While basic life insurance is usually free or low cost for an employee thanks to a group rating structure, voluntary life insurance is at the employee’s expense, as is voluntary child life insurance, supplemental coverage for a spouse and AD&D coverage. The cost for voluntary life insurance is also usually at a group rate rather than individual and doesn’t require a medical exam, making it cheaper than traditional life insurance with individual health rate considerations.
Payment
When an employee buys voluntary life insurance, the employer usually deducts the premium directly from the employee’s salary. Not only does this make it easier for the employee, but it also ensures the coverage stays in effect until the employee no longer wants the coverage or no longer works with the company. The employee can elect to cancel the coverage or change the policy at the annual open enrollment but may not be able to cancel outside the enrollment period.
Value
If you want to build cash value, then you’ll want to choose voluntary whole life insurance. There is no cash value option when you buy voluntary term life insurance. The cash value usually has a guaranteed interest rate for growth accumulation, but this can vary by insurance company and policy.
Taxation
Voluntary life insurance is usually paid with pre-tax dollars. This means the cost of a voluntary life plan lowers the employee’s total taxable income, which can reduce the amount they owe in income taxes. If paid with post-tax dollars, there are no taxes taken from the death benefit and the post-tax amount may be tax deductible. If the death benefit amount is less than $50,000, the premium is usually not taxable.
Portability
If an employee benefit is portable, they can take the policy with them when they leave the company, whether voluntarily or involuntarily. The employee will be responsible for paying the premium directly to the insurance company and the rate could change. The employer decides if employee benefits are portable, and the employee will have to fill out paperwork to continue their plan after separation.
Customizability
Some voluntary life insurance policies include optional riders, which allow employees to customize their life insurance. AD&D insurance is one rider option, though some companies make this a separate policy. Another rider could be a waiver of premium for disability, which means the employee won’t have to make payments while disabled and unable to work.
Voluntary life insurance, like supplemental life insurance for your spouse and children, is optional. It is also similar to FEGLI life insurance, which is federal group life insurance for federal employees.
How Much Does Voluntary Life Insurance Cost?
The cost of voluntary life insurance depends on the type of policy, coverage amount and group rate structure. Voluntary employee life insurance can be cheaper than term life insurance because it’s not based on individual health and medical exams but on demographic company rates and age. Your premium could increase annually or in specific age bands; for example, your rate could increase when you turn 35, 40, 45, 50 and older.
If you're young and healthy, you might get cheaper rates with traditional term life insurance that is locked in for a longer period. For instance, depending on age, gender and other factors, you could pay between $278.93 to $3,425.60 per year for a 20-year, $500,000 term life insurance policy.
People in good health should consider term life insurance as their primary source of life insurance, especially breadwinners and those with substantial financial obligations. You’ll get the most coverage out of each dollar since your health will help you lock in a cheaper rate and your premium won’t increase as often as a voluntary life insurance policy can. You should consider voluntary employee life insurance as an expansion of your individual coverage, not a replacement.
What Are the Pros and Cons of Voluntary Life Insurance?
The advantage of voluntary employee life insurance is that coverage is affordable and you don’t need a medical exam. That said, it’s not the best option for everyone. Consider the pros and cons of voluntary life insurance to decide if it’s worth it for you.
Pros and Cons of Voluntary Life Insurance
- Affordable
- May be portable
- Great for covering final expenses and smaller financial obligations
- Optional
- Easy application and approval
- No medical exam
- You get to choose your beneficiary
- Riders and add-on features
- Term and whole life available
- Not a lot of coverage
- Not a substitute for individual coverage
- Might not be portable
- Rates can increase as you age
Although you don’t need a medical exam and voluntary employee life insurance can be cheaper for people in poor health, it might not be the most cost-effective for the healthiest employees. It also usually has low coverage caps, which isn’t enough for people with heavy financial obligations, like a mortgage and child education expenses. But since it’s optional, employees can choose whether to buy it.
Voluntary employee life insurance sometimes has riders to customize coverage, and you can choose your beneficiary. Depending on your employer's portability agreement, you might be able to take the policy with you when you leave the company. While not a substitute for individual coverage, voluntary life insurance may be a cheap option to increase your coverage if you have large life insurance needs.
Should You Purchase Voluntary Life Insurance?
Since coverage limits are low, voluntary life insurance is often best as a supplement or for people who don’t have a significant need for life insurance. If your employer offers basic life insurance and a voluntary life plan, consider increasing your coverage if you can afford it.
Here are a few reasons you should consider purchasing voluntary life insurance.
If basic life insurance isn’t enough
If the basic life insurance your employer offers isn’t enough to cover your final expenses, adding voluntary life insurance can help your beneficiary cover expenses if you pass away while the coverage is in force.
If you’re single
Single people without children often find they don’t need much life insurance. Voluntary life insurance with basic life coverage may be enough to cover final expenses and other small financial obligations.
If you don’t have a mortgage
Those with a mortgage often buy term life insurance to allow their beneficiary to pay the house off after they pass, so their loved ones won’t be burdened with mortgage payments. But if you don’t have a mortgage, voluntary life insurance may be all you need.
If you’re on a budget
Those on a budget may find that voluntary life insurance is more cost-effective than other life insurance policies since there is no medical exam and your health isn’t as much of a factor, especially if you’re in poor health and otherwise won’t qualify for individual coverage.
If you’re a senior
Seniors usually have no dependents, as children may be adults. If you only need to cover medical and final expenses, your need for less coverage may make you a good candidate for voluntary employee life insurance coverage.
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Frequently Asked Questions
Learning what voluntary employee life insurance is can help you decide if you should buy it. We also answer the most frequently asked questions about voluntary life insurance below.
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