What Is Voluntary Life Insurance? Definition, Types, and Example

What Is Voluntary Life Insurance?

Voluntary life insurance is a financial protection plan that provides a cash benefit to a beneficiary upon the death of the insured. It’s an optional benefit offered by employers. The employee pays a monthly premium in exchange for the insurer’s guarantee of payment upon the insured’s death.

Employer sponsorship generally makes premiums for voluntary life insurance policies less expensive than individual life insurance policies sold in the retail market.

Key Takeaways

  • Voluntary life insurance is an optional benefit provided by employers that provides a death benefit to a beneficiary upon the death of an insured employee.
  • It is paid for by a monthly premium that often takes the form of a payroll deduction.
  • It is available to an employee immediately upon hiring or shortly thereafter.
  • It is usually less expensive than life insurance policies purchased in the retail market.
  • This benefit will cease upon the employee's termination or if they quit.

Understanding Voluntary Life Insurance

Many insurers provide voluntary life insurance plans with additional benefits and riders. For example, a plan might feature the option to purchase insurance above the guaranteed issue amount. Depending on the amount of increase, policyholders may be required to submit proof that they meet minimum health standards.

Another is coverage portability, which is the ability of a policyholder to continue the life policy upon termination of employment. Each employer has guidelines for porting a policy. However, it is typically between 30 and 60 days after termination, and it requires the completion of paperwork. 

A third option is the ability to accelerate benefits, whereby the death benefit is paid during the life of the insured if they are declared terminally ill. There is also the option to purchase life insurance for spouses, domestic partners, and dependents, as defined by the insurance company.

Lastly, an immeasurable benefit offered by most employers is the option to deduct premiums from salary. Payroll deductions are convenient for the employee and allow for the effortless and timely payment of premiums.

Special Considerations

In addition to these benefits, some insurers provide optional riders, such as waiver of premium and accidental death and dismemberment riders. Riders are most often executed at issue and for an additional fee.

Voluntary life insurance is often available to employees immediately or soon after hire. For employees who opt out, coverage may next be available during open enrollment or after a qualifying life event, such as marriage, the birth or adoption of a child, or divorce. Selecting the right type of voluntary life insurance requires examining current and anticipated needs and is dependent on each person’s circumstances and goals.

Additionally, it's also worth comparing an employer's offering with the plans of other firms to ensure it's among the best life insurance policies currently available.

There are two basic types of voluntary life insurance: voluntary whole life and voluntary term life.

Types of Voluntary Life Insurance

There are two types of voluntary life insurance policies provided by employers: voluntary whole life and voluntary term life. The latter is also known as group term life insurance. Face amounts may be in multiples of an employee’s salary or stated values, such as $20,000, $50,000, or $100,000.

Voluntary Whole Life Insurance

Voluntary whole life protects the entire life of the insured. If whole life coverage is elected for a spouse or dependent, the policy protects that person’s entire life as well. Typically, amounts for spouses and dependents are less than amounts available for employees.

Just as with permanent whole life policies, cash value accumulates according to the underlying investments. Some policies only apply a fixed rate of interest to the cash value, whereas others allow for variable investing in equity funds.

Voluntary Term Life Insurance

Voluntary term life insurance is a policy that offers protection for a limited period, such as five, 10, or 20 years. Building cash value and variable investing are not characteristics of voluntary term insurance. As a result, premiums are less expensive than their whole life equivalents. Premiums are level during the policy term but can increase upon renewal.

Voluntary life is often paid with pre-tax dollars. If it is paid with after-tax dollars it may be tax-deductible.

Example of Voluntary Term Life Insurance as a Supplement

Some participants choose voluntary term life as a supplement to their whole life insurance. For example, Jordan is married with children and has a $50,000 whole life insurance policy. After receiving a financial needs analysis, it is determined that their life insurance is insufficient. The life insurance broker suggests that Jordan maintain at least $300,000 in life insurance while their children are minors.

Jordan's employer offers voluntary term life insurance with reasonable premiums, and Jordan elects the coverage to supplement their existing coverage until their children reach the age of majority.

What Is Voluntary Dependent Life Insurance?

This employee benefit can cover a spouse, children, and any other eligible dependents, depending upon the rules laid out in the plan. In the event that a dependent dies, the employee would receive the death benefit.

Is Voluntary Term Life Group Insurance?

Yes. Voluntary life insurance is covered via a group policy put in place by an organization. Because of this, most individual employees can purchase a policy under the umbrella plan without underwriting or a medical exam. Additionally, the cost of the premiums will typically be less than for an individual policy.

How Much Voluntary Term Life Insurance Do I Need?

While you may want or need a larger death benefit, voluntary term life is usually limited by an employer to either 1x-2x the amount of your annual compensation. Other companies will set a cap at between $50,000 - $250,000 in coverage.

What Is the Difference Between Group Term and Voluntary Term Life Insurance?

Voluntary life insurance and group life insurance are often used interchangeably.