Voluntary Life Insurance: How It Works, Types, Benefits

Voluntary life insurance is a financial protection coverage 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.

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.

1: 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.

2: 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.


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. 

Structure of Life Insurance

Life insurance contracts are made up of three essential components:

1. Death Benefit

The death benefit is essentially the face value that is guaranteed to beneficiaries in the event of the death of the policyholder. It represents the cash payout that is estimated to be needed by the beneficiaries.

2. Premiums

Premiums are the money paid by the policyholder for the insurance coverage. The insurer will determine the amount of the premium by estimating a fair value using actuarial science. Actuarial science is a discipline that uses mathematical and statistical concepts to assess risk.

For example, the life expectancy of the policyholder must be estimated. It is a crucial estimation that is based on various factors, such as the age of the policyholder, health condition, occupational hazards, etc.

3. Cash Value

The cash value acts as a savings account that a policyholder can use throughout the life of the insured individual. It can also be used to pay premiums or upgrade the insurance plan.

Should you have voluntary life insurance?

There are benefits to buying voluntary life insurance.

  • This type of life insurance has limited underwriting required. This allows for people with health conditions or lifestyles that might otherwise disqualify them to qualify for life insurance.
  • The rates are lower by 10 to 20 percent, and that makes these life insurance policies affordable for those who might not otherwise purchase them.
  • Many companies also offer the employee the opportunity to purchase a policy for their spouse and children if desired.

Voluntary life insurance is sometimes convertible if employment ends but is often expensive to do. It usually requires underwriting or further proof of insurability.

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