What Is Voluntary Life Insurance and Who Should Buy It?

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Updated: November 6, 2024

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Voluntary employee life insurance is a benefit some employers offer to upgrade the basic life insurance they provide. Depending on the company, employers may also offer supplemental voluntary spouse life insurance or child voluntary life insurance. Accidental death or dismemberment (AD&D) insurance may also be available.

Voluntary life insurance through an employer 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. Understanding the meaning of voluntary life insurance coverage and exploring the pros and cons can help determine if voluntary employee life and AD&D coverage are for you.

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Key Takeaways

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Voluntary life insurance coverage 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.

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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.

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While group rates make voluntary employee life insurance cheaper than traditional life insurance, it’s not a substitute for individual coverage. Employees may be unable to keep the policy if they leave the company.

How Voluntary Life Insurance Works

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 premiums, which are automatically deducted from their paycheck.

Voluntary life insurance is an optional benefit available to new hires soon after their hiring date. After that, basic and voluntary life insurance is only available once a year during the company’s open enrollment period. Employers may offer basic life insurance for free or at a low cost and allow upgrading of coverage at the employee's expense. Employees can choose to decline the coverage.

Here is how voluntary employee life insurance compares to other types of life insurance:

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    Death benefit

    Voluntary life insurance may have a coverage limit of up to $100,000, while individual life insurance can have a limit of $10 million or more. There may be an option to add an accelerated death benefit rider for terminal illness. This rider accelerates the death benefit after a terminal diagnosis with a life expectancy of less than 12 or 24 months, 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.

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    Eligibility

    Employers decide whether to make voluntary life benefits 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 through an employer is available shortly after an employee is hired and annually during open enrollment. Employees can purchase a voluntary life plan at their own expense or decline coverage.

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    Cost

    While basic life insurance comes for free or at a low cost for employees, thanks to a group rating structure, voluntary life insurance is at the employee’s expense, as are voluntary child life insurance, supplemental coverage for a spouse and AD&D coverage. The cost of voluntary life insurance is usually at a group rate rather than an individual rate. It doesn’t require a medical exam, making it cheaper than traditional life insurance with individual health rate considerations.

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    Payment

    When an employee buys voluntary life insurance, the employer usually deducts the premium directly from the employee’s paycheck. 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 it or works with the company. The employee can elect to cancel the voluntary life benefit or change the policy at the annual open enrollment but may not be able to cancel outside of the enrollment period.

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    Value

    If you want to build cash value, 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.

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    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, no taxes are taken from the death benefit, and the post-tax amount may be tax deductible. The premium is usually not taxable if the death benefit amount is less than $50,000.

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    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.

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    Customizability

    Some voluntary life insurance policies include optional riders, which allow employees to customize their life insurance. AD&D insurance is a rider option, though some companies offer this as 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.

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, cons and differences to consider — understanding these 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, you may renew coverage annually or 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. This policy type has no cash value component.

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.

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MONEYGEEK DICTIONARY

Voluntary term life insurance is also known as voluntary group term life insurance. These two terms refer to the same type of insurance product when discussed within the context of employer-offered benefits.

Both describe a type of life insurance that is optional for employees, provided at group rates and meant to offer temporary coverage during the policy's term. The use of "group" in the name emphasizes the collective nature of the policy under employer sponsorship, while both are fundamentally term life insurance policies that employees can choose to pay for voluntarily.

Basic Life vs. Voluntary Life Insurance

Basic life insurance, also called EE life insurance or employee life insurance, is an employee benefit with a face amount 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. However, it should not be used as a substitute for individual life insurance.

Voluntary life insurance, in contrast, offers additional coverage beyond the basic life insurance. It caters to employees needing higher coverage due to personal financial responsibilities or family commitments.

The difference between basic life and voluntary life insurance lies in the flexibility and coverage. Voluntary life coverage allows for more extensive protection and customization, making it suitable for those who seek comprehensive benefits beyond the basic offering.

Voluntary Life Plan vs. AD&D Coverage

Accidental Death and Dismemberment (AD&D) insurance is specifically designed to cover deaths or injuries that occur as a result of an accident. AD&D policies typically pay out in the case of accidental death or significant injuries, such as loss of limbs, sight or permanent paralysis.

In many cases, AD&D coverage can be included as part of a voluntary employee life insurance plan, either as an integrated benefit or an optional rider that employees can choose to add.

The difference between voluntary life and AD&D coverage lies in the conditions under which the policy pays out. While voluntary employee life insurance covers any cause of death, AD&D is limited to accidental circumstances, providing a narrower scope of protection but often at a lower cost.

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VOLUNTARY LIFE INSURANCE IS OPTIONAL

Voluntary life insurance, like supplemental life insurance for your spouse and children, is an optional life insurance through an employer. It is also similar to FEGLI life insurance, which is federal group life insurance for federal employees.

Cost of Voluntary Life Insurance

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 demographics, company rates and age. Your premium could increase annually or in specific age bands; for example, your rate could rise 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 and $3,425.60 per year for a 20-year, $500,000 term life insurance policy.

Pros and Cons of Voluntary Life Insurance

Voluntary life insurance offers a balanced mix of advantages and drawbacks that cater to diverse financial and personal needs.

Pros and Cons of Voluntary Life Insurance

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PROS
  • Affordability: Group rates often make it more budget-friendly.
  • Convenience: Premiums are deducted directly from your paycheck.
  • Ease of Access: It usually doesn't require a medical exam.
  • Additional Coverage: It offers more than the basic employer-provided life insurance.
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CONS
  • Limited Customization: Policies may not be as flexible as individual plans.
  • Employment Dependency: Coverage may cease if you leave your job.
  • Limited Enrollment Periods: It’s usually available only during specific times of the year.
  • May Be Insufficient: Coverage might not meet all your financial needs.

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.

Who Should 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:

  1. 1

    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.

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    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.

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    If you don’t have a mortgage

    Those with a mortgage often buy term life insurance so their loved ones won’t be burdened with mortgage payments after they pass, allowing the beneficiary to pay the house off. But if you don’t have a mortgage, voluntary life insurance may be all you need.

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    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. Your health isn’t as much of a factor, especially if you’re in poor health and otherwise won’t qualify for individual coverage.

Voluntary life insurance through an employer can be an effective solution for individuals assessing their insurance needs based on their life stages, health status and financial responsibilities. It provides a flexible and affordable way to ensure financial protection without the need for extensive coverage.

How to Buy Voluntary Life Insurance

Acquiring voluntary life insurance is generally a hassle-free experience, especially when you know what to expect. The process is set in motion when you're newly employed or during your company's annual open enrollment period. Here's a step-by-step guide to help you navigate this financial decision.

  1. 1

    Review Employer's Offer

    The first step is to clearly understand what your employer provides. Employers usually offer basic life insurance, often at no cost, and may also offer voluntary life insurance as an optional benefit. Make sure to read through the details to understand the coverage levels and any other associated benefits.

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    Choose Coverage

    Once you understand what's on offer, the next step is to decide how much coverage you need. This will depend on factors such as your financial obligations, dependents and long-term financial goals. The right amount of voluntary life benefit coverage ensures you're neither underinsured nor overpaying.

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    Complete Application

    After deciding on the coverage amount, you'll need to fill out an application form. This form may include questions about your health and lifestyle. While many voluntary life insurance policies don't require a medical exam, some might, especially if you opt for higher coverage.

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    Set Up Payment

    After your application is approved, you'll need to arrange for the premium payments. These are usually automatically deducted from your paycheck, making it a convenient process. Ensure that the deductions align with your budget.

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    Review Policy

    The final step is to thoroughly review your policy once it's approved and issued. Check all the terms, conditions and benefits to make sure everything aligns with what you initially signed up for. If there are discrepancies, contact your HR department or the insurance provider for clarification.

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Who Should Not Buy Voluntary Life Insurance

While voluntary life insurance offers a range of benefits, it's not the ideal choice for everyone. Certain life circumstances and financial needs may make other types of insurance more suitable. Below are some scenarios where optional employee life insurance might not be your best option.

  • High Coverage Needs: Individual policies may be a better fit for those who need a substantial amount of life insurance coverage. Voluntary life insurance often has coverage limits, which might not meet the financial needs of those with significant liabilities or dependents.

  • Job Hoppers: If you change jobs frequently, maintaining consistent life insurance coverage can become complicated. Each job change could mean a new policy, and there's no guarantee that your new employer will offer similar benefits.

  • Customization Seekers: If you're looking for a policy that you can tailor to your specific needs, voluntary life insurance might not be for you. These policies often come as prepackaged plans with limited customization options.

  • Healthy, Young Individuals: Younger, healthier individuals might find that they can get more competitive rates with individual term life insurance. Since these policies often require a medical exam, being in good health can work to your advantage in securing lower premiums.

Alternatives to Voluntary Life Insurance

Voluntary life insurance is just one of many life insurance options available. If it doesn't quite meet your needs, other types of life insurance might be a better fit for your specific circumstances.

  • Term Life Insurance: This type of insurance provides coverage for a specified term, usually 10, 20 or 30 years. It's often a good choice for those who need high coverage levels for a particular period, such as until children are grown and financially independent.

  • Whole Life Insurance: This policy type offers lifelong coverage. It also features a cash value element that accumulates over the years, offering an extra financial cushion you can access when necessary.

  • Universal Life Insurance: Universal life insurance allows more flexibility, combining certain elements of both term and whole life insurance. You can adjust your premiums and death benefits, and it also has an investment component that can grow over time.

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MONEYGEEK EXPERT TIP

Depending on the policy, you may have the option to convert voluntary life insurance into an individual life insurance policy. You can usually do so without a medical exam, making it a convenient choice if you're leaving your job but want to maintain your coverage. Contact your insurance provider or HR department to initiate the process to take advantage of this option. Keep in mind that this is often an offering, not a guarantee, and may come with terms and premiums different from your original policy. It's a valuable option, especially for those anticipating career changes.

FAQ: Voluntary Life Insurance

We answered the most frequently asked questions about voluntary life insurance below to help you decide if you should buy it.

What is voluntary life insurance?

What does voluntary life insurance cover?

How does voluntary life insurance work?

How much does a voluntary life insurance policy cost?

What is the difference between basic life and voluntary life insurance?

Should I get voluntary life insurance through work?

What is optional life insurance?

Is voluntary life insurance whole or term?

What is voluntary term life insurance?

What is voluntary spouse life insurance?

What is voluntary child life insurance?

Do I need voluntary life insurance?

How much voluntary life insurance do I need?

Can you borrow from voluntary life insurance?

Is voluntary life insurance pre-tax or post-tax?

About Mandy Sleight

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Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.

Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.

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