We are on the run to question every plan for life coverage and support you on your journey to explore your life insurance options. Today we are taking a closer look at voluntary life insurance.
Voluntary life insurance is often cheaper than other types of coverage and doesn’t require completing any medical exam, but you might have to answer a health questionnaire. The employer’s sponsorship makes this option even more attractive for employees with health conditions that may prevent them from getting necessary care elsewhere in some cases.
It sounds fantastic, but should you choose voluntary life insurance?
To help you answer this question, in today’s article, we will cover:
- What is Voluntary term life insurance?
- Is the Voluntary life insurance policy for you, and how to get it?
- What are the basics of different varieties of voluntary life insurance plans?
- Pros and cons of voluntary term life insurance.
- What is the difference between whole life insurance and voluntary term life insurance?
- How can you become financially independent?
Keep reading this article to get the answers!
What Is Voluntary Life Insurance?
Voluntary and company-paid basic life insurance are typically two types of life insurance available through work that employees pay. Voluntary life insurance is an optional benefit offered by some employers to support financial protection with cash and death benefit. It is considered a group plan.
Every month, the employee pays a premium (the amount of money paid) which allows him to have the insurer’s guarantee of payment upon an employee dies. But, the employee’s beneficiaries will receive a death benefit that the insurer pays only if the policy is in force after the policyholder’s death.
Generally, people find it valuable that premiums for voluntary life insurance policies are more budget-friendly than individual life insurance policies due to employer sponsorship.
Besides voluntary life insurance plans themselves, there are additional benefits and riders.
Some plans may have a feature to buy insurance above the guaranteed issue amount. In some cases, depending on the amount of increase, the life insurance company might request proof of health.
Another employee benefit is coverage portability. It is the option of a policy owner to continue the life policy upon termination of employment. In this case, it’s usually required to complete paperwork.
The next option with voluntary life insurance is the opportunity to have death benefits paid off during a lifetime if the policyholder is declared terminally ill. Also, it’s possible to purchase life insurance for spouses, domestic partners, and dependents.
This last benefit is favored by many, and it is an immeasurable benefit. Most employers offer it to take away the amount for premiums from salary. Payroll deductions make this process pretty easy for the insured employee because there is no possibility of forgetting your monthly payments.
We mentioned riders beside the additional benefits. Without going into much detail, a rider is an insurance policy provision that can add benefits or compensation to a basic insurance policy.
Not all of the insurance, but some provide optional riders like waiver of monthly premium and accidental death and dismemberment riders. To accomplish this, riders usually require an additional fee.
If you just started a new job (or planning to start one), it is essential to know that voluntary life insurance is often available immediately or soon after hire. In case employees quit, coverage may be available during open enrollment or after a qualifying life event (marriage, the birth or adoption of a child, divorce, etc.)
Choosing the right type of voluntary term life insurance is vital to examining current and possible future needs and being honest with your circumstances and goals. Before signing a contract, compare the employer’s offering with the plans of other firms to ensure the best choice.
Before moving forward, we want to highlight two main benefits of voluntary life insurance:
- Applicants typically won’t have to go through a medical exam. This is not the case if they want to increase existing coverage for themselves or others beyond a predetermined amount.
- Some voluntary life insurance policies are portable, meaning that employees can keep the coverage even after leaving their employer.
On the other hand, many people need a larger death benefit than voluntary term life insurance, which is usually limited by an employer to 1-2x the amount of their annual compensation.
How to Get Voluntary Term Life Insurance?
The first condition individual must meet to obtain voluntary life insurance is to be employed in a company that offers this benefit. The employer’s policy is not available in the private marketplace.
If the firm offers voluntary life insurance, the employee usually enrols in this program as soon as hired or after 90 days, depending on the firm. In some cases, it’s needed to renew this benefit during the company’s open benefits enrollment period; in some, it’s not.
Anyhow, the best advice is to talk to HR in your firm about these specific characteristics that vary from firm to firm.
For Whom Voluntary Term Insurance Would Be Suitable?
This is usually the option for people with health issues who cannot qualify for other life insurance coverage since, in voluntary life insurance, medical exams aren’t required.
This only applies to a certain amount of coverage. It’s a cheaper option than buying guaranteed issue life insurance on your own. But keep in mind that there is usually a low cap set on the initial coverage limit for applying without a medical exam.
Sometimes voluntary life insurance is a choice for people who already have an individual life insurance policy but need additional coverage for additional financial security. So, suppose someone, before their diagnosis, bought a $100,000 indexed universal life policy. In that case, they can build up their current death benefit with a voluntary life insurance program for a relatively low premium. If their employer foots the bill, then there is no premium.
Types of Voluntary Life Insurance Policy
You probably already noticed that some aspects of voluntary life insurance vary. One of the reasons is due to different types.
Term and whole life are two main types of voluntary life. Generally, employers most often offer voluntary term life insurance over voluntary whole life insurance.
Voluntary Term Life Insurance
Voluntary term life is also known as group term life insurance. The primary characteristic is that the face amount can be multiple of an employee’s salary (or stated values). It stays in effect typically between 10 and 30 years.
Many employers usually offer this because they are significantly cheaper, and it’s less likely that they will allow employees to take a term policy with them after the termination of the employment contract. Additionally, there is no option to build cash value and variable investing.
Voluntary Whole Life Insurance
Voluntary whole life insurance is up to ten times more expensive than term life insurance. But, voluntary whole life never expires, and there are much better chances for the to employer allow the employee to take it when leaving the company, as well as higher premiums.
The big difference between these two types is tax-free cash value accounts that offer voluntary whole life support, while voluntary term life doesn’t. Thanks to a tax-free cash-value account, it is achievable to build value over time and gain interest or returns.
Unlike voluntary term life, voluntary whole life insurance protects the insured during the entire life. Suppose the insured chooses the coverage for a spouse or dependent. The policy covers that person’s entire life as well. The expense for spouses and dependents are usually less than for employees.
The similarity to permanent insurance is that cash value accumulates according to the underlying investments. With some policies, you have a fixed interest rate to the cash value, while with others, you can vary investing in equity funds.
Pros and Cons of Voluntary Life Insurance Policy
Pros of Voluntary Life Insurance Coverage
- Simplicity: The simplicity of enrolling in voluntary life insurance is unmatched. You check a box and select your coverage amount while updating employee benefits. Premiums are automatically deducted from your paycheck, so you don’t need to worry about bills or keep track of anything other than what you want for yourself.
- Guaranteed issue: since it is often available without a medical exam or health history, this might work for people with severe health conditions or those who would have to pay higher than average premiums because of their condition.
Cons of Voluntary Life Insurance Coverage
- Lack of flexibility: If an employee wants to leave the firm, it’s highly unlikely they can keep the policy. With private insurance, the coverage is in place no matter where the individual works.
- Standardization: It’s almost impossible to tailor a voluntary life to individual circumstances due to rigid rules. Usually, there is a limitation on how much coverage a policyholder can purchase and what kinds of riders are available. With a private policy, this is entirely in contrast.
Voluntary Life Insurance vs. Whole Life Insurance
Some people want to avoid whole life insurance because it is more expensive. It is, but it’s also much more beneficial for the individual. Unfortunately, the affordable coverage that group life insurance offers isn’t the best.
Whole life insurance is one kind of permanent life insurance that provides permanent death benefit coverage for the insured’s life. Besides that, it also has a savings component in which cash value accumulates.
Except for the death benefit, the cash value offers a living benefit to the policyholder. Because of that, people use the whole life policy as a source of equity.
The cost of permanent whole life policies depends on several factors, including age, occupation, and health history of the applicants. That means if you don’t have more significant health problems and are relatively young, the expenses will be the same as with other policies.
If your situation isn’t ideal, you will probably have to pay a little bit more monthly, BUT you are getting a lot more in exchange. Besides individual coverage, everyone with permanent life insurance can use it to replicate the banking system but with their own money!
Every time the policyholder makes a premium payment, a portion of that payment goes into the savings portion of the policy, which is called cash value. After each payment, the cash value accumulates at a taxed-free rate and can be utilized as needed and as the policy owner wish.
That money can be used for anything you want! You can repay some debt, use it as a down payment on a house, put it towards retirement savings, or even purchase coverage with a higher death benefit to ensure your family members with more money.
And at this point, Infinite Banking Concept starts.
Become Financially Independent
You saw that you could use a Whole life insurance policy for Infinite Banking Concept or over-funded life insurance, but let’s see what it is!
The basic idea of the Infinite Banking Concept is strategically using a whole life insurance policy as a personal endless banking system. How?
You will borrow money against your policy instead from a bank and individually dictate cash flow. Simultaneously, you still allow your policy to earn dividends even through using that money elsewhere. In simpler words, you can build wealth while borrowing and repaying the money held in the policy’s cash value.
This financial strategy has much more benefits than any basic life insurance because it allows you to achieve your individual and unique financial goals and end up dealing with high banking fees or interest rates on loans. It makes the most sense to have private coverage and investment vehicle in one tool.
We hope this article helped you understand the voluntary life insurance policy and its advantages and disadvantages. If you don’t have any serious medical issues and especially if you’re young, the whole life policy is way more beneficial than any other group life insurance.
Not only can you have life coverage, but you can also become financially independent, take personal finance into your hands and achieve all your goals!
In our free Wealth Nation masterclass, you can get all the essential information in just one hour!