Voluntary life insurance can be a valuable employee benefit for many workers. Coverage is generally low-cost and there are no medical exams required.
What Is Voluntary Life Insurance?
Voluntary life insurance is an employee benefit option offered by many employers to their employees. The employee pays the monthly premium to the insurance company offering the policy. In exchange, they the employee's beneficiaries will receive a death benefit should the employee die while the policy is in force.
Many companies also offer the opportunity for the employee to purchase policies for their spouse and children if desired.
Due to the employer's sponsorship of the policy, the premiums are generally lower than employees would find for a similar policy if they purchased it privately.
How Does Voluntary Life Insurance Work?
Voluntary life insurance is generally guaranteed issue up to some limit on the death benefit. Guaranteed issue means that there is no medical exam required; applicants won't be refused based upon any sort of medical condition. This can be a great benefit for employees who might otherwise be unable to purchase life insurance privately due to a medical condition or other reason.
Policies vary and will have different conditions and terms based upon what the employer negotiates with the insurance and based upon the insurance company offering the policies. A key feature that employees will want to be aware of is whether or not the coverage is portable should they leave their employer. Again, this will vary from group plan to group plan, if this is an issue for the employee, they should be sure to understand this aspect of the coverage when deciding whether or not to enroll in the coverage.
Note that many employers offer a basic level of life insurance coverage for employees free of charge. This is often an amount that is one times their salary. If the amount of the death benefit is over $50,000, then the amount that covers the death benefit in excess of $50,000 is taxable to the employee under IRS rules. If the employee needs a death benefit in excess of the amount offered free of charge by the employer, that's when they will need to opt into that additional coverage through the open enrollment process, and, of course, pay the cost of that additional death benefit.
Types of Voluntary Life Insurance
Voluntary life insurance comes in two forms, whole life and term life.
Voluntary term insurance offers coverage with no buildup of cash value inside of the policy as with permanent insurance like whole life. Term insurance is pure insurance, this is also the case when purchased as voluntary life as part of a group plan through your employer. The term policy will typically offer a death benefit with a level premium.
Policies vary, but typically the premium will remain level for a set period like five, 10, 15 years or some other period. The employee may need to re-enroll in this coverage each year during the employer's open enrollment period for employee benefits.
Voluntary whole life insurance is the less common than term insurance. Some employers will offer permanent insurance coverage such as whole or universal life coverage as an option. Permanent insurance policies offered as voluntary life options will have higher premiums than term options. The premiums are typically level for the life of the policy, and they build cash value. Due to the nature of permanent insurance you may not have any issues moving the coverage should you change employers, though you will want to understand this aspect of the policy before purchasing permanent insurance coverage.
Voluntary Life Insurance vs. Standard Term Life Insurance
Standard term life insurance is a policy that is purchased privately from an insurance company. With the coverage in terms of paying a premium for a death benefit is similar in many ways to voluntary term life coverage offered by an employer, there are some differences.
Purchasing a term policy, or most other types of life insurance, via an insurance company on your own will almost always entail completing a medical questionnaire. This may just consist of completing a form, or it might mean giving the insurance company permission to contact your physician and allow them access to your medical records. The insurance company may still allow you to purchase the policy you are seeking, but adverse medical information could impact the premiums and other features of the policy you are eventually offered. Or the company could deny coverage altogether.
Voluntary term life via your employer is guaranteed issue and will not require you to provide any sort of medical information, at least for the basic levels of death benefit that are offered in the employer's plan. This can be a huge feature for employees with certain medical conditions that may prohibit them from purchasing private coverage.
Size of the Death Benefit
When looking to buy a term policy from an insurer outside of your group's plan, you will have your choice of death benefits within the parameters of what the company might offer and their underwriting standards. This is typically a fairly wide range.
With term policies offered under a voluntary life benefit, you will be limited to the death benefit levels offered. In the event you wish to purchase a larger death benefit, the insurance provider may allow this option, but you will generally need to go through the medical underwriting process.
Continuation of the Policy
If you purchase a term policy privately, the policy will remain in force for the stated term of the death benefit with a level premium as long as you continue to pay the premiums on the policy. This might be 10 years, 20 years, 30 years or some other period. Changing jobs will have no impact on the policy status.
Voluntary life term policies may or not have a conversion privilege when you leave the company. There will be a cost and premiums might be higher. You might also be required to change to another type of policy such as some sort of permanent insurance.
Voluntary life insurance can be a valuable employee benefit. For those with medical issues it might be the best and most cost-effective means to obtain life insurance. Even for those with other policies purchased privately, voluntary life can be an inexpensive supplement to other life insurance coverage.
As with any financial purchase, employees are wise to understand all policy rules and restrictions, as well as the cost before they enroll for voluntary life insurance.
Introducing TheStreet Courses:Financial titans Jim Cramer and Robert Powell are bringing their market savvy and investing strategies to you. Learn how to create tax-efficient income, avoid mistakes, reduce risk and more. With our courses, you will have the tools and knowledge needed to achieve your financial goals. Learn more about TheStreet Courses on investing and personal finance here.