Voluntary Life Insurance: Understanding Employer-Sponsored Insurance
A 2019 study showed that nearly half of Americans don't own life insurance. Their reason? 65% believed that it was too expensive, and 67% stated that they had other financial obligations to take care of.
Life insurance can take up a sizable chunk of one's budget. And when you're trying to balance immediate expenses like mortgages, auto loans, student loans, and credit card bills, it makes sense to put life insurance on the back burner.
But thankfully, more and more employers are offering voluntary life insurance in their employee benefits packages. With lower premiums, hassle-free payments, and minimal requirements, it's become a viable option for people who don't have the means (or time) to take care of an individual policy.
But is voluntary life insurance really worth it? And can it replace a standard term or whole life insurance policy? In this comprehensive overview, we’ll cover everything you need to know about voluntary life insurance.
What Is Voluntary Life Insurance?
Also called employee life insurance, voluntary life insurance is a type of insurance policy that an employer may offer as a part of the employee benefits package.
This type of insurance has all of the basic components of your typical individual life insurance policy, such as monthly premiums, cash value, and death benefit. However, there are some key features that make this policy unique, including:
- Payroll deduction: Voluntary life insurance is employer-sponsored, which means that your company will take care of everything from the application process to paying premiums.
This is not to say that your company covers your premiums, though! Employees still have to pay for their coverage, but instead of paying the amount yourself every month, your company will simply deduct the premium from your payroll automatically.
- Lower premiums: Voluntary life insurance is typically less expensive than the usual term or whole life insurance policies – in most cases, up to 10-20% lower. However, this also means that you’ll likely have reduced coverage as well. This makes it a good option for people on a budget or for people who don’t need a ton of coverage.
- Guaranteed Issue: One of the biggest draws of voluntary life insurance is that it is often a guaranteed issue policy. This means that you can qualify for the policy regardless of health status.
- No medical exam required: Unlike most individual life insurance policies, policyholders are not required to undergo a medical exam or answer a health questionnaire to qualify. People with health problems often have difficulty finding a cheap insurance policy (or any insurance policy at all) – voluntary life insurance is one of the few low-cost options available for them.
Extend to dependents: Some companies offer coverage for their employees' beneficiaries as well. So on top of having your own life insurance coverage, you can also set up a voluntary life insurance policy for your spouse and/or child. However, your dependents' policies will usually have significantly lower coverage than your own.
Types Of Voluntary Life Insurance
Some employers already include a free basic life insurance policy in their employee benefits package. This is different from voluntary life insurance, as it is often an optional policy that you can take out in addition to your basic employee policy.
If you want to increase the coverage/benefit of your basic policy, consider these two types of voluntary insurance:
Voluntary Term Life Insurance
Voluntary term life insurance is very similar to your standard individual term life insurance plan. Policyholders pay monthly premiums in exchange for temporary coverage. Your policy covers you for an agreed-upon number of years (called a term), which can last anywhere between 5 and 30 years. Once the term is up, you can choose to terminate your policy, renew it, or convert it into whole life insurance.
Because the coverage period is limited, voluntary term life insurance is often much cheaper than whole life. The lack of an investment option is another reason voluntary term rates are more affordable.
In some cases, voluntary term life insurance is also called group life insurance. However, this only applies when the company takes out one policy to cover multiple employees.
Voluntary Whole Life Insurance
Voluntary whole life insurance is both more expensive and less common. Some estimate that the cost of whole life insurance is anywhere from 10-15 times more expensive than term life insurance. This is because whole life insurance provides lifetime coverage, which means that your policy will only expire when you die.
This type of life voluntary life insurance policy also comes with an investment component called a “cash value”. The cash value is a savings account where policyholders can keep their money and accrue interest over time.
Depending on your policy, you may be able to borrow against your cash value. This allows you to loan from your account for any reason, whether you need to pay off bills or simply want to go on a holiday.
When you die, your beneficiaries will be able to access both the death benefit and the cash value. This makes the return on this type of policy much higher than that of voluntary term life policies.
Advantages And Disadvantages Of Voluntary Life Insurance
When purchasing voluntary employee life insurance, you have to make sure you know what you're buying into. To help you make a more informed decision, here are some of the pros and cons of voluntary life insurance.
Pro: You Don’t Have To Sign Up Yourself
43% of Americans surveyed said that they don't own any life insurance simply because they "haven't gotten around to it". Between researching companies, finding a decent quote, filling out an application, and completing a medical exam, purchasing life insurance can be a time-consuming task.
Voluntary life insurance removes most of the hassle of signing up for life insurance. Your employer does most of the legwork for you, including paying your premiums. Most companies simply deduct the monthly premiums from the employee's payroll each month – giving you one less thing to worry about.
Pro: Guaranteed Issue/No Medical Exam
When you apply for individual whole or term life insurance, you have to take a medical exam as part of the underwriting process. Insurance companies want to minimize risk as much as possible, so they have to collect important medical information
This includes the applicant's medical history and whether they have any serious or chronic medical conditions that might lead to an early death. Life insurance companies usually charge higher rates for people who have chronic illnesses and family histories of heart disease, stroke, diabetes, and the like.
Unlike traditional life insurance policies, voluntary life insurance is usually a guaranteed issue. This means that applicants do not have to undergo any kind of medical exam to qualify for insurance coverage. At most, you might have to answer a health questionnaire, but this shouldn't affect your chances of qualifying for voluntary whole or term life insurance.
Pro: Age Doesn't Matter
Age is another major factor that affects the price of your premiums. The older you get, the more expensive life insurance will be for you. This is why most insurance agents recommend their clients to get insured as young as they can.
However, with voluntary life insurance, your age won’t have much of an impact on the price of your policy. This is especially true with group insurance – the average age of the group is considered instead of the individual’s age.
Con: Not All Plans Are Portable If You Change Jobs
One of the biggest downsides of employees’ life insurance is its lack of portability. Employers have different guidelines for carrying over a voluntary insurance plan when you switch jobs. In some cases, you must have been insured for at least one year to maintain your policy.
Depending on your employer and the insurance company they partner with, you may not even be allowed to continue your policy once you change jobs. The moment you terminate your employment, you lose your insurance coverage.
Con: Voluntary Life Insurance Coverage Is Usually Less Than Individual Insurance
Employer-sponsored insurance is cheaper – and thus provides less coverage – compared to individual insurance. This can be an advantage or a disadvantage, depending on how you look at it.
If you're low-income or on a tight budget, this may work in your favor. While it's possible to find inexpensive term life insurance, it's not easy finding cheap permanent coverage. Sometimes, your best bet at finding an affordable deal is with employees’ insurance.
But if you feel that you can afford a bigger, more comprehensive insurance plan, you might want to think twice. It may be better to forgo the insurance plan included in your employees' benefits package and purchase your own individual policy.
Is Voluntary Life Insurance Worth it?
Voluntary life insurance is an excellent option for people who are on a tight budget or don’t want to stress about the application process. However, it may not be the best choice for people who need more coverage, including:
- Breadwinners who need to leave behind a sizable sum to cover for their family's daily needs, student loans, and other debts
- People who may leave behind elderly or special-needs dependents who need consistent medical care.
In these cases, a long-term term life insurance policy or a whole life policy may be better options.
If you want to learn more about voluntary life insurance, Wesley Insurance, LLC can help you navigate through the different terms and policy types. Contact us today to find out how we can help you!