Life Insurance

Understanding Voluntary Life Insurance: Meaning, Varieties, and a Sample Case

Jon Austin Lim | Mar 25, 2024
Voluntary Life Insurance

Life insurance is a crucial financial tool that provides protection and peace of mind for individuals and their families. While employer-sponsored life insurance policies are common, some individuals choose to enhance their coverage through voluntary life insurance. Below, learn about what voluntary term life insurance is, the types of voluntary life insurance available, pros and cons of voluntary life insurance, and a real-life example to illustrate how voluntary employee life insurance works.

What is voluntary term life insurance?

V​​oluntary life insurance is a type of life insurance coverage that employees can opt to purchase in addition to any employer-provided life insurance. Unlike employer-sponsored policies, voluntary life insurance allows individuals to customize their coverage based on their specific needs and circumstances. Employees typically pay the premiums for voluntary life insurance on their own, but they can set it up so that payments can be deducted from their paycheck.

How voluntary life insurance works: a real-life look

Voluntary life insurance can be a convenient option for some people who wish to add more coverage to protect their loved ones. Consider a 35-year-old professional who is beginning to raise a young family. She values the life insurance coverage provided by her employer but recognizes that the coverage amount may not be sufficient to meet the financial needs of her family in the long run. Concerned about the potential gaps in coverage, she decides to enroll in the voluntary life insurance offered by her employer.

She starts by carefully evaluating her family's financial needs, including outstanding debts, future educational expenses for her children, and the mortgage on their home. After assessing her requirements, she decides to purchase an additional $250,000 in voluntary life insurance coverage. This supplemental coverage provides her with additional peace of mind, knowing that her family will have some of the financial resources they might need in the event of her unexpected passing.

Key features of voluntary life coverage

There are certain features that are unique to voluntary employee life insurance including:

  • Employee choice: One of the primary advantages of voluntary life insurance is that it gives employees the freedom to choose the coverage amount that best suits their individual needs. This flexibility allows individuals to tailor their life insurance to accommodate personal financial goals and family obligations.
  • Portability: Voluntary life insurance is often portable, meaning that employees can maintain their coverage even if they leave their current employer. This portability can be especially valuable in situations where an individual changes jobs or experiences a career transition.
  • Supplemental coverage: Voluntary life insurance is designed to supplement employer-provided life insurance, filling potential gaps in coverage. This is particularly important for individuals with dependents or those seeking additional financial protection beyond what their employer offers.
  • No medical underwriting: Many voluntary life insurance plans do not require employees to undergo medical underwriting when enrolling. This means that individuals may be able to secure coverage without providing extensive medical information, making it a convenient option for those who may have pre-existing health conditions. When medical underwriting is necessary, the applicant will be asked some questions regarding their health.

What are the pros of voluntary term life insurance?

For some people, there may be some advantages to getting a voluntary life insurance policy. These can include:

  • Being able to customize your coverage based on your specific financial needs, ensuring that you have an adequate amount of life insurance to protect their loved ones.
  • Knowing that your policy can go with you. Many voluntary life insurance policies are portable, meaning that individuals can maintain coverage even if they change employers. This flexibility provides continuity and peace of mind during career transitions.
  • Owning the policy. Since you typically pay the premiums for voluntary life insurance, you have a sense of ownership and control over your coverage, aligning it with your individual financial goals.
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What are the cons of voluntary term life coverage?

If you’re considering a voluntary term life insurance policy, there are some potential downsides to be aware of.

  • Cost: Voluntary life insurance premiums are paid by the individual, and depending on the coverage amount chosen, the cost can be higher than what employees pay for employer-sponsored life insurance. Be sure to look carefully at your budget to see how much of a premium you can afford before you sign up for coverage.
  • Limited coverage amounts: There may be limits on the amount of voluntary life insurance coverage an individual can purchase, and these limits might not be sufficient for those with high-income levels or extensive financial responsibilities. In that case, you may want to shop around for a life insurance policy on your own.
  • No guarantee of approval: While some voluntary life insurance plans may not require medical underwriting, approval is not guaranteed. You’ll likely have to answer some basic medical questions to see if you qualify when the coverage requires underwriting. Individuals with certain health conditions may find it challenging to secure coverage without providing medical information.
  • Employer-dependent: The availability and terms of voluntary life insurance are dependent on the employer's offerings. If an employer does not provide an option that you’re seeking, you may need to explore alternative life insurance solutions.
  • Potential reduction in retirement contributions: If the voluntary life insurance premiums are deducted directly from your paycheck, it could impact the amount of money available for retirement contributions or other essential expenses. You should take all of your financial priorities into consideration when adding on a new expense like voluntary life insurance.

What is voluntary spouse life insurance?

Voluntary spouse life insurance, also known as voluntary spousal life insurance, is a type of life insurance coverage that employees can choose to purchase to provide financial protection for their spouses or domestic partners. This coverage is typically offered as a voluntary benefit through an employer-sponsored insurance program. 

Unlike employer-provided life insurance, which may include coverage for the employee only, voluntary spouse life insurance allows the employee to choose whether to include their spouse or domestic partner in the coverage.

What are the different types of voluntary life insurance?

Besides voluntary term life insurance, there may be other types of insurance available to you as an employee. 

  • Voluntary whole life insurance: Whole life insurance provides coverage for the entire life of the insured, as long as premiums are paid. It can accumulate cash value over time and policyholder can access the cash value through loans or withdrawals. Who it’s for: Those seeking lifelong coverage with the added benefit of cash value accumulation.
  • Voluntary universal life insurance: Universal life insurance is a flexible permanent life insurance option that allows policyholders to adjust both the death benefit and premium payments. It also accumulates cash value, which can be accessed through loans or withdrawals. Who it’s for: People who want flexibility in adjusting their coverage and premiums over time.
  • Voluntary Variable Life Insurance: Variable life insurance combines life insurance coverage with a risk-tolerance component. Policyholders can allocate their premiums among a variety of variable accounts. The cash value and death benefit fluctuate based on the performance of these variable accounts. Who it’s for: Individuals comfortable with risk and seeking the potential for higher returns within their life insurance policy.
  • Group voluntary life insurance: Offered through employers, group voluntary life insurance allows employees to purchase additional life insurance coverage beyond what is provided by the employer. Premiums are often deducted from the employee's paycheck. Who it’s for: Those who want the convenience of purchasing additional coverage through their workplace and may benefit from group rates.
  • Voluntary accidental death and dismemberment (AD&D) insurance: AD&D insurance pays a benefit if the insured dies or suffers a covered injury due to an accident. This type of coverage is often available as a voluntary option and may provide additional benefits for specific injuries or accidents. Who it’s for: Employees who want coverage specifically for accidental death or injuries.

Critical illness insurance: While not strictly life insurance, critical illness insurance is often offered as a voluntary option. It provides a lump sum payment if the insured is diagnosed with a covered critical illness, such as cancer, heart attack, or stroke.Who it’s for: People concerned about the financial impact of a serious illness and seeking additional financial protection.

Is voluntary life insurance a good idea?

Voluntary life insurance offers individuals the opportunity to take control of their life insurance coverage, tailoring it to meet their specific needs. This type of coverage can be a valuable supplement to employer-provided life insurance, providing financial security and peace of mind for individuals and their loved ones. When considering voluntary life insurance, it's important to assess personal circumstances, financial goals, and the specific offerings provided by employers to make an informed decision about coverage.

If you’re not interested in the voluntary life insurance options offered by your employer, you can investigate other life insurance on your own. The advantage to this if you can shop around, compare quotes, and find an insurance company that you’re comfortable working with.

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