Voluntary Life Insurance: What It Is and How It Works (2024)

Many employers offer voluntary life insurance as an optional benefit. When you opt-in, your employer will deduct the policy’s premiums from your paycheck. If you change jobs, you can keep the coverage, but you’ll have to pay the premium directly to the insurance provider.

You can generally choose from a few voluntary life insurance coverage options, which may include whole or term life insurance. The death benefit amounts tend to be lower than what you’ll find with traditional life insurance policies.

Beyond the mechanics of signing up for and paying your policy, voluntary life insurance functions similarly to any other life insurance policy. For example, you’ll still need to designate at least one beneficiary who will receive a death benefit upon your death, so long as the policy is still in force when you pass away.

Your beneficiaries can use the payout however they want, including to finance your end-of-life expenses, settle existing debts, fund a college education or as income replacement.

Types of Voluntary Life Insurance

Most often, you can choose between a term or whole life plan when you sign up for voluntary life insurance coverage. Here’s an overview of these two types of insurance products:

• Term life insurance: A term policy lasts a specific period, such as 10, 20 or 30 years. It generally costs less than other types of life insurance and is ideal for covering temporary needs, such as paying off a mortgage or funding a loved one’s education. Some providers let you convert your coverage to a whole life policy once the term ends. Read more: Best term life insurance companies
• Whole life insurance: With voluntary whole life insurance, you get lifelong coverage —as long as you pay your premiums. Whole life policies are more expensive than term policies, in part because they accumulate cash value at a set interest rate that you can withdraw or borrow against. While whole life insurance tends to provide fixed returns on your cash value, market conditions might also affect growth. Read more: Best whole life insurance companies

Key Takeaways:

• Voluntary life insurance is an optional benefit that many employers provide. Some employees may also opt-in to get supplemental life insurance coverage.
• A voluntary life insurance policy is more accessible than an individual life insurance policy because it usually does not require a medical exam.
• Some key benefits of a voluntary life policy include its portability, the convenience of payroll deductions for premiums and the flexibility to choose coverage amounts.
• Most often, you can choose between term and whole life insurance when signing up for a voluntary policy.

Although voluntary life insurance is often portable, convenient and typically doesn’t require a medical exam, it might not suit everyone due to limited coverage options and certain underwriting restrictions. Here are the benefits and drawbacks of voluntary life insurance.

Benefits of Voluntary Life Insurance

• Convenience: Premium payments come right out of your paycheck, which makes it easy to keep your policy in force.
• Portability: Most voluntary life insurance policies are portable, which means you can maintain consistent coverage even after you leave the job. Rather than have your monthly premiums come out of your paycheck, you would pay the insurer directly.
• No medical exam: The insurance company generally will not require you to undergo a medical exam, making the approval process quicker and more accessible for people with pre-existing medical conditions. Some voluntary life insurance policies have a guaranteed-issue amount, meaning your answers to health questions will not preclude you from getting at least some coverage.
• Supplement to existing life insurance: You can use voluntary life coverage to fill the gaps in your existing policy and ensure sufficient protection. You can tailor it to fit your financial obligations, including a mortgage, existing debts or education costs.

Drawbacks of Voluntary Life Insurance

• Often limited coverage options: Voluntary life insurance plans are generally limited in terms of coverage options and policy types. For example, you might not find a universal life policy offered as a voluntary life insurance benefit. Likewise, you might find that coverage amounts do not come in a high enough increment to meet all of your life insurance needs.
• Underwriting restrictions: You will not need to go through a detailed underwriting policy for a basic policy, but you may have to answer a detailed health questionnaire, or in rare cases, undergo a medical exam if you want a high coverage limit.
• Enrollment window limitations: You can generally opt for voluntary life insurance when you start a new job or during specific enrollment periods. If you miss this window, you must wait for the next open enrollment period, which can delay coverage.

Although voluntary life insurance policies are some of the cheapest coverage options you can find due to group rates, prices can also vary significantly depending on your policy type.

For instance, your premiums will be lower if you choose a term life policy. If you choose whole life insurance or another form of permanent life insurance, you will pay relatively higher premiums. Aside from the policy type, several other factors affect the cost of voluntary life insurance.

Factors that Affect the Cost of Voluntary Life Insurance

• Your age: A life insurance company will consider you lower risk if you’re younger, which translates to lower premiums. As a result, older people will likely see higher policy costs.
• Coverage amount: You generally pay higher premiums when you choose a policy with a higher amount of coverage.
• Your gender: Women generally have a longer life expectancy, so insurance companies charge them lower rates compared to men of the same age.
• Policy features: The cost of your policy increases when you add riders, such as an accidental death and dismemberment (AD&D) rider.

Consider your budget, current financial situation and future financial obligations when deciding on the best voluntary life insurance option for you. Keep the following in mind.

• Assess your coverage needs: To estimate how much life insurance you need, consider your current financial obligations, including credit card debt and your mortgage. You should also determine how much income your dependents will need without you to provide for them.
• Understand the policy type: Once you understand how much coverage you need, learn how each type of policy works, particularly term life and whole life. Knowing about each policy type will help you decide which will best suit your needs.
• Consider additional riders: Your voluntary life insurance policy may try to sell you add-ons, such as a waiver of premium or AD&D rider, for an additional fee. Weigh the cost against the potential benefit of the rider.
• Check the insurer’s reputation: It’s essential to check an insurance company’s financial stability as it can affect its ability to settle claims. AM Best and Demotech are two reputable independent credit rating agencies for insurance companies. You can also look at customer reviews on sites including Trustpilot and the Better Business Bureau (BBB) to see if the insurer provides reliable customer support.
• Read the policy terms: It is important to understand what your policy does and does not cover and if there are any limitations. The policy document will also have information regarding its portability, which will help you understand if you can keep the policy on switching jobs.

How much life insurance coverage you need depends on a variety of factors, including both your current financial obligations — such as your mortgage and personal debts — and your future obligations, such as your children’s college education.

While there are general rules of thumb you can use to decide the appropriate amount of coverage, exact amounts will vary depending on individual situations. We recommend talking to a financial advisor to help you determine the right amount of life insurance.

Voluntary life insurance can be worth it if you are looking for additional coverage to ensure your loved ones do not face financial hurdles after you pass away. Voluntary life insurance can be particularly attractive to people who might get turned down for traditional life insurance coverage due to health issues.

Before diving into life insurance of any kind, it’s important to assess your current financial situation and your loved ones’ ability to pay current and future financial obligations after your death. A fiduciary financial advisor can help you decide whether voluntary life insurance is a good fit for you.