Voluntary life insurance is an employer-offered supplemental policy offering financial protection without mandatory health exams.
Updated June 17, 2024Life insurance is a tool that helps protect your loved ones financially in the event of your passing. A life insurance policy's death benefit may help cover a mortgage, educational costs, monthly bills and any other living expenses. While you can purchase a policy on the open market, employers often provide basic and optional additional coverage that may address your needs.
One type of life insurance you may be able to get relatively easily is voluntary life insurance. What is voluntary life insurance? It's supplemental life insurance coverage offered by an employer. It provides protection, usually as a multiple of your salary, for a lower cost. While you may need more coverage than employer-sponsored life insurance, having this benefit is one way to secure basic coverage.
Voluntary coverage is an added benefit provided by employers to their employees. It works like many other life insurance policies, providing a death benefit to beneficiaries if you die while the policy is in effect. However, you should check to confirm whether coverage goes with you if you leave the company.
Your employer may offer basic life insurance coverage and pay for some or all of the premium as a benefit. Voluntary coverage is an added policy on top of basic coverage. You'll need to pay for it — though it's often sold at a discounted rate. Typically, you can set up your payment to come out of your pay, just as you do your 401(k) contribution.
Signing up for this coverage is entirely voluntary. Even if your employer offers it, you don't have to join. However, it could be a fit for some, including those who struggle to get approved for life insurance due to health issues or those who only need a small amount of coverage.
Employers typically offer benefits to help attract and retain good employees. Basic group life insurance is one example. Often, such coverage is guaranteed issue, meaning you don't need to provide health information or undergo a medical exam. Coverage amounts are typically smaller. For example, it may equal one times your salary. Your employer may cover all or most of the cost as part of your benefits package.
Voluntary coverage is an added benefit on top of this. You can purchase this supplemental life insurance in addition to the group protection you already have. Typically, you'll have the option to buy this in multiples of your salary. For example, you can purchase coverage that pays your beneficiaries a death benefit that's 10 times your annual salary.
The cost of voluntary coverage is generally more affordable than buying through an insurer on your own. Understand: that may vary depending on your health and the type of life insurance. Typically, you can cover premium costs from your paycheck — they're deducted pre-tax. However, the death benefit still may not cover all of your needs.
Voluntary coverage is typically more affordable than purchasing life insurance on your own. With a voluntary policy, your employer may get better rates from an insurer because they're offering coverage to a large pool of people. Generally, the larger the potential pool, the lower the rates will be. With voluntary coverage, you're choosing to pay for additional supplemental life insurance on top of that.
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With employer-provided life insurance, you'll get basic coverage with a smaller death benefit (often one or two times your annual salary) at no cost to you.
Not everyone needs or wants voluntary coverage. Are loved ones financially dependent on you? The death benefit helps provide financial stability upon the death of a provider — especially in certain situations where finding other coverage may be difficult or expensive.
There are a few instances where a voluntary life insurance policy may be a good fit for your needs. These include:
Remember, voluntary coverage may not be enough for your needs. And it may not travel with you if you leave your job, so it's important to get the details of the policy to determine if it's a fit.
There are two primary types of life insurance — though not all employers offer both. Understanding the differences can help you decide between them.
Term life insurance lasts for a set number of years and provides a death benefit to your loved ones if you die while covered, provided your premiums are current. It's common for term policies to cover between 10 to 30 years, though they could be as short as five years. Most group life insurance policies provided by employers fall under term coverage. Term coverage is typically more affordable than permanent life insurance because it has a limited duration and doesn't have a cash value component.
However, depending on your coverage, you may need to renew your policy annually or every five years. With voluntary term life insurance, you may find that the renewal dates are shorter, and your premium costs could increase as you age, though the death benefit will stay the same.
Once the term is over, your coverage expires. At that time, you may be able to get a new policy, renew your current one for another period or convert the policy to a permanent one. If you die after the term ends, there is no death benefit for your loved ones.
Some employers may offer permanent life insurance, though it's not as common. With a permanent life insurance policy, you're covered for the duration of your life, so it's more likely that you'll be able to keep your policy in place even if you change employers. Generally, a voluntary permanent life policy will keep the same premium and death benefit over time. However, double-check your employer's portability rules for life insurance coverage.
Whole life insurance is typically more expensive than term coverage. A permanent policy has two components: a death benefit and cash value. With a cash value, the insurer sets aside a portion of your premium into a savings or investment-style account, depending on your coverage.
Over time, the cash value accumulates tax-free, and you may be able to borrow or withdraw from it. 1 However, any money you take from the cash value portion of your policy may reduce the total death benefit distributed to your loved ones.
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While voluntary coverage is not mandatory for employees to purchase, it does come with potential benefits. Here's a breakdown of some of the main ones:
Due to group rates, voluntary life insurance policies are typically less expensive than individual policies you'd purchase independently. With group policies, the risk is spread out among a larger group of people, so the rates are often less for your employer than they would be if you purchased a policy on your own.
Many voluntary life insurance policies offer simplified underwriting, so you probably won't need to take a medical exam or fill out a lengthy health questionnaire.
Also, most employers allow your premiums to be automatically deducted from your pay, making the payment process seamless and easy to manage.
As long as you pay your premiums, beneficiaries will receive the death benefit if you die during the coverage period. That said, if you die after your coverage ends or your policy terminates due to not paying premiums, no death benefit will go to your beneficiaries.
Many voluntary life insurance policies allow you to keep your coverage if you leave your job or retire. But check with your employer or the insurer to be sure. You might be able to convert it to an individual policy or continue it at a group rate, although the premiums could be higher.
Depending on the policy, you might have the option to add riders or additional benefits, such as:
When considering voluntary life insurance, it's essential to understand the potential benefits and limitations. Then compare it with other options to help ensure your coverage meets your individual needs.
Generally, employers make signing up for voluntary coverage straightforward. However, if you have questions about the process, don't hesitate to contact your human resources department. They'll be able to walk you through the process and provide more information.
Depending on your employer's rules and eligibility requirements, there may be limited times when you can sign up for voluntary coverage. For example, you may have to sign up when you first join a company or during an annual enrollment period. Confirm enrollment dates with your employer.
Your employer may also have eligibility requirements on coverage. For instance, you may have to work at least 30 hours a week.
Voluntary coverage may not be right for everyone. On the other hand, it could be a good fit but not provide enough coverage. Before you purchase any life insurance policy, running the numbers is essential. That way, you'll know what kind of coverage you may need to help provide your loved ones with some financial security.
Some factors you may want to consider:
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You have options with life insurance coverage, so finding one that works for your situation can help protect your family and provide financial security long after you're gone.
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A voluntary policy provides another path for getting life insurance protection and providing a death benefit for your loved ones in the event of your death. If you can't qualify for other types of coverage or afford higher premiums, it's one way to purchase a policy and gain some financial security. Since it may be a more affordable option, and may have some tax benefits, it could worth discussing with a financial professional to determine if it's a fit for you.
However, keep in mind that the coverage may not be enough for your needs, especially if you are the primary earner in your family. You also may lose your policy if you change jobs, so relying on it as your primary source of life insurance could present some risks.
Most employers set up premium payments for a voluntary policy to come directly from an employee's paycheck, so it's often paid with pre-tax dollars. However, if you pay it with after-tax dollars, the premium costs may be tax-deductible — speak with a tax professional to make sure.
Generally, the first $50,000 in premiums for employer-provided life insurance is tax-exempt. Any premiums you pay past that amount could be counted as taxable income.
Finally, if you die with your policy intact and up to date, your beneficiaries generally get the death benefit tax-free.
There are a few ways voluntary coverage differs from a basic employer-provided plan, including:
Like basic coverage, policies are often term, meaning they have an end date. Premiums may change depending on your age. And, most likely, you won't have to submit in-depth medical questions or an exam to get coverage.
How much life insurance coverage you need depends on various factors, including your age, health, income and dependents. Speaking with a financial professional can help you determine how much coverage is right for you. They'll review your finances, look at your long-term plans and work with you to determine how much coverage can help financially protect your loved ones if you pass.
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