What Is Voluntary Life Insurance and How Does It Work?

Last modified: April 12, 2022

Voluntary life insurance is an optional benefit offered to employees, which will pay out a cash benefit to predetermined recipients (known as beneficiaries) upon the event of the employee’s death. Unlike life insurance policies taken out directly with an insurance company, voluntary life insurance is traditionally cheaper. 

This guide will cover the following topics: 

What Is Voluntary Life Insurance? 

Voluntary life insurance is an optional benefit offered to employees when they join a company or as part of their yearly selection of company benefits. It might be provided immediately upon hiring or shortly afterward. 

The employee pays the monthly premium, which often takes the form of a payroll deduction. In return, employees’ beneficiaries (it can be anyone: their children, spouse, close family members, etc.) will receive a death benefit in the event of the employee’s death. 

Voluntary life insurance is traditionally cheaper than standard retail life insurance policies, as the company can leverage a cheaper premium through the negotiating power of multiple employees.

How Does Voluntary Life Insurance Work?

Voluntary life insurance is paid via a monthly premium usually arranged via salary deduction from the employee’s usual pay packet. Policies are traditionally valid for a specific term and end when you leave your job. In addition, whole life insurance policies are also available. However, premiums here will likely be higher than the fixed-term alternative. 

Voluntary life insurance usually comes with additional benefits or riders you can opt for, which enhance the terms of your basic life insurance policy.

Optional benefits might include:

  • Additional life insurance policies allow you to cover additional individuals, like voluntary spouse life insurance or voluntary child life insurance (also known as voluntary dependent life insurance). It usually provides a smaller fixed amount compared to the employee’s own policy.
  • Waiver of premium coverage is a supplementary insurance clause used to ensure that your premium is covered if you are unable to work due to physical impairment, critical illness, severe injury, and other qualifying conditions. 
  • Portability – some policies may allow you to transfer your voluntary life insurance to a personal policy when you leave your employer. Your premium may go up If this happens because you are no longer part of a group negotiation via your employer. Instead, you have an individual agreement directly with the insurer. Portability terms may outline whether the policy can be transferred in the event of redundancy, contract termination, or resignation.
  • Accidental death and dismemberment cover might be available as a rider to the voluntary life insurance policy, providing coverage in the event of the insured’s unintentional death or dismemberment.

What Are the Different Types of Voluntary Life Insurance?

The two main types of life insurance for an employee are voluntary term life insurance and voluntary whole life insurance. Let’s get to know more about them.

Voluntary Term Life Insurance

Voluntary term life insurance is a life insurance policy that will provide a death benefit to your beneficiaries only for a set amount of years — usually five, ten, or fifteen. It’s more common than whole life, as most employees will only work for a fixed time. 

Voluntary term life insurance plans are usually cheaper than whole life insurance plans, as they don’t allow for variable investing or build-up in value.

You might select voluntary term life insurance as a supplement to your personal life insurance policy. This could be useful, for example, if you have children and wish to offer them enhanced coverage in the event of your death.

Voluntary Whole Life Insurance

Policies that can be transferred to a personal life insurance policy after leaving the employer are whole life insurance policies. They are designed to cover you for life. Your spouse or dependents may also be covered for an additional fee if you select additional policies for them as a supplement to your own.

What About Voluntary Dependent Life Insurance? 

These plans are cheaper than buying a whole new policy for your spouse or children, but they will likely have limited coverage compared to other forms of life insurance. They are usually riders to the employee’s voluntary life insurance policy. 

Voluntary Spouse Life Insurance

Voluntary spouse life insurance provides a cash payout to a spousal beneficiary in the event of the insured’s death. As with the employee’s own life insurance policy, it may be transferred to a personal policy after the employee leaves. It’s available in two forms: term and whole life policies.

Voluntary Child Life Insurance

Voluntary child life insurance is life insurance for the employee’s children. It means that the insured will receive a cash payout in the event of the child’s death. Note that premiums will likely be higher the older the child is. The child’s life insurance can be either whole life or term life insurance.  

Is Voluntary Dependent Insurance Worth It?

It’s a useful policy for your dependents. However, check out the policy terms before making a decision. 

Dependent life insurance has different maximum coverage limits for children and spouses. Additionally, the age of the dependent will impact the cost of the premium. Payouts for voluntary dependent life insurance are usually smaller and subject to the same limitations as the employee’s insurance.

Is It Good to Have Voluntary Life Insurance?

Voluntary life insurance is a great way to help your loved ones financially in the event of an unexpected death. Here are a few questions to help you understand how useful it is and whether you need it: 

  • How long are you planning to stay with the employer?
  • Is your policy portable if you leave, and how much will the subsequent premiums be?
  • Is the policy available for a specific term or whole life?
  • Do you have an existing health condition that makes the policy more cost-effective?
  • Can you benefit from additional dependent life insurance policies? 
  • What level of coverage do you already have through a personal life insurance policy?

When Are Life Insurance Policies More Expensive?

If you have a pre-existing condition or dangerous hobby, getting a traditional life insurance policy might be very expensive or impossible. Voluntary life insurance policies offer significantly lower rates and don’t require medical information. This makes them more cost-effective than a standard life insurance policy. However, you should always check the terms of your policy to see what is covered.

What’s the Difference Between Accidental Death & Dismemberment Cover and Voluntary Life Insurance?

Voluntary life insurance will pay out to your beneficiaries in the event of death for any reason: accidental or natural. On the other hand, AD&D policies only cover accidental death and injuries resulting from an accident. You can get both covered under a voluntary life insurance policy or obtain either of the policies through your place of work.

Accidental death and dismemberment cover is a payout to your beneficiaries in the event of the loss of your life or limbs. It covers car accidents, equipment accidents, falls, homicides, drowning, etc. Refer to your policy terms to find out what accidents are covered.

Accidental death is not paid out if death is caused by:

  • Drug or alcohol consumption
  • Natural causes
  • Suicide

While accidental death results in a full payout to beneficiaries, dismemberment pays out only a portion of the full payout, depending on the severity of the condition. Dismemberment can refer to a loss of a limb, sight, or hearing with full or partial paralysis. 

If you’re not sure which policy to go for, voluntary life insurance or AD&D coverage, consider the following points:

  • What level of personal coverage you already have with either life insurance or AD&D
  • Whether you have a dangerous hobby that would make you more likely to consider AD&D
  • Whether you can purchase AD&D as part of your voluntary life insurance
  • Whether you are more likely to have an accident, e.g., you drive frequently, your job or location is more dangerous

Conclusion

Voluntary life insurance is an excellent supplement to an existing policy. It’s suitable for individuals with long-term conditions that might make obtaining their own life insurance policy difficult. Remember that voluntary term policies through an employer are cheaper. However, they’re not always transferable to a personal policy when you leave the company.