Voluntary Life Insurance

Published on :

21 Aug, 2024

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Voluntary life insurance refers to an additional protection plan provided by employers giving cash benefits to the beneficiary on the insured's demise. It aims to offer financial security to family members upon the insured's death and bypasses health issues or old age to get insurance.

Employees can immediately & easily avail themselves of insurance coverage benefits upon employment. Employers provide insurance options to their staff. Its premiums are often deducted from the employee's paycheck and pre-taxed. Its coverage ends if the employee resigns or is fired. It is typically more affordable than retail insurance.

What Is Voluntary Life Insurance?

Voluntary life insurance is an employer-offered plan that provides financial security to families upon the insured's death, bypassing health issues or old age.
This life insurance has two categories: term life with low premiums and constant death benefit for 10–30 years and whole life insurance with higher premiums and increasing death benefit.
Moreover, it offers death benefits to employees from any cause. At the same time, AD&D provides coverage for accidental death and dismemberment, and basic life insurance offers death benefits irrespective of the cause.

How Does Voluntary Life Insurance Work?

Voluntary life insurance refers to special non-mandatory life insurance offered to the employee by their employer as an extra benefit. It originated in the mid-twentieth century but became popular in the 1950s. This practice began because employers sought to get and retain new talents easily. Its mode of working is similar to that of other life insurance policies.

A newly joined employee requests a life insurance policy. Employer provides them with the insurance policy as per existing policies. Moreover, the employee determines the premium amount and other details as permitted by the policy and the employer. After enrolment into the policy, the staff then pays monthly premiums from their paycheck.

Thus, an employer commits to the employee to pay cash to their family in case of their death. Besides, the insured employee designates one or more beneficiaries who will receive the death benefit in the event of their passing. Thus, the voluntary life insurance beneficiaries can be family members, friends, or other individuals or entities chosen by the insured.

The employee gets accelerated benefits for terminal illness, coverage portability on resignation or terminations, and buys cover for spouses or dependents. Hence, it provides monetary security to the insured employee's family. It helps employer reduce their liability if an employee dies. More importantly, employees can tailor them as per requirements.

Furthermore, as the premium is pre-taxed, it becomes cost-effective and affordable for the employee.

Therefore, it's essential for employees considering voluntary life insurance coverage to assess their financial needs, review the options provided by their employer, and choose coverage that aligns with their goals and circumstances.

Additionally, to determine the exact cost of voluntary life insurance, employees should review the options and rates provided by their employer's insurance plan during enrollment.

Types

It has two categories, namely:

#1 - Whole Voluntary Life Insurance

A sort of life insurance coverage that an employer provides as part of an employee benefits package is voluntary whole life insurance. It enables workers to acquire full life insurance coverage freely.

Moreover, it provides coverage for the entire lifetime of the insured individual as long as premiums are paid. It provides both a death benefit and an escalating monetary value element. Because whole life insurance covers the insured for their entire lifetime, the premiums are typically greater than those for term life insurance.

#2 - Voluntary Term Life Insurance

Voluntary term life insurance is a type of life insurance policy that employers offer their employees as part of their benefits package, allowing employees to purchase term life insurance coverage voluntarily.

Employees can choose to enroll in this coverage during enrollment or when they become eligible for the benefit. Term life insurance policies have a specific coverage period, which can range from 1 year to several decades, depending on the options offered by the employer's insurance plan. Common term lengths include 10, 20, or 30 years.

Moreover, it benefits individuals who want financial security for their families while minimizing insurance costs.

Benefits And Coverage

It is an additional benefit provided to the employee besides the usual benefits. Hence, discussed here are the benefits given to employees under it:

Financial Security for Beneficiaries: It provides the insured's beneficiaries financial security if the employee dies.
Affordability: It has lower premiums, making it affordable to employees.
Coverage for Spouses and Dependents: Employees can buy it for their dependents, maids, and spouses.
Accelerated Benefits: Terminal illnesses are earmarked for early cash benefits to employee and their beneficiary.
Waiver of Premium: In challenging times and the disability of employees, the premium gets waived.
Accidental Death and Dismemberment (AD&D) Riders: It also offers the insured unintentional death or injury coverage.
Simplicity of Enrollment: Any new or old employee can subscribe to it without hassle or medical checkup.
Customizable Coverage Amounts: Employees can select the appropriate premium per their eligibility and needs.
Peace of Mind: The employer, employee, and their beneficiaries get peace of mind as it provides additional cash to the beneficiary on the employee's death.
Portability: Some voluntary life insurance plans offer portability options. Hence, employees can continue their coverage even if they leave or retire.
Tax Benefits: The death benefit paid out to beneficiaries is typically tax-free, providing financial security without creating a tax burden.

Examples

Let us use a few examples to understand the topic.

Example # 1

Imagine Karen, an employee at a large corporation, is offered voluntary life insurance as part of her employee benefits package. She decided to enroll in the program during the annual enrollment period. Therefore, Karen selected a coverage amount of $250,000 to provide financial security to her family in case of her unexpected passing.

She doesn't have to undergo a medical exam to qualify, making the enrollment process straightforward. Moreover, she pays her monthly premiums conveniently deducted from her paycheck. This voluntary life insurance policy offers her peace of mind, knowing that her designated beneficiaries will receive the tax-free death benefit if anything were to happen to her during the term of the coverage. Hence, the flexibility of choosing the coverage amount and the absence of medical underwriting make voluntary life insurance a valuable addition to her overall financial plan.

Example # 2

According to insurance providers and brokers, many employers, mainly in the financial services and IT sectors, are starting to provide their workers the choice to upgrade their group health coverage at a cost. The banking, finance, and IT sectors have seen a rise in the tendency. According to Sanjay Datta, head of underwriting and claims at ICICI Lombard, others are gradually following suit.

These programs, often known as voluntary top-ups, allow employees to enhance their coverage by covering the additional costs. "Medical insurance top-ups are the most typical. According to Sanjay Kedia, country head and CEO of Marsh India, according to the market research conducted by Marsh Insurance Brokers, 25% of the companies now provide top-up policies, up from 17% in 2013.

The top-up coverage typically varies from ₹2-3 lakh, depending on the arrangement between the insurer and the employer, and only becomes effective once the base cover (wholly covered by employers) has been used up. Insurance brokers suggest that the annual premium for these top-ups might range from ₹3,000 to ₹6,000 per family, depending on the employee's age, coverage, the insurer's plan, their history with claims, and other factors.

Voluntary Life Insurance vs AD&D vs Basic Life Insurance

Let us use the table below to understand the basic differences between the three:

Voluntary Life Insurance	AD&D(Accidental death and dismemberment)	Basic life insurance
It offers a death benefit to the employee. Employees can get the benefit upon death from any cause.	Voluntary accidental death and dismemberment insurance policy provides coverage only for accidental death and dismemberment of employees due to accidents.	The policy also offers death benefits to the policyholders irrespective of the cause of death.
Only general life coverage is offered to the subscriber.	For accidental injuries or death and dismemberment incidents, get coverage.	A bare minimum coverage of policyholder death is provided.
Here, the employer deducts the premium amount from the employee's paycheck towards the premium.	Moreover, the employee pays the premiums.	Employer mainlyprovides the premiums for the employee.
An employee can subscribe to it through their employer only.	Employer mainly provides the premiums for the employee.	These employers make it available to the employee.
Additional benefits are included in it, like terminal illness benefits and cash value accumulation.	It reimburses accidental death, permanent disabilities, and dismemberment.	Sometimes, it may also provide employees coverage for accidental death or dismemberment.
Employees can tailor their policy features, premiums and, coverage amount per their needs.	Limited flexibility for customization is available to policyholders.	It offers some flexibility for customization of the policy to the employee.
Employers provide it to their employees as a voluntary benefit.	It is offered as a supplemental benefit to the employee by the employer.	Furthermore, employees get it as a standard insurance benefit from their employer.

Frequently Asked Questions (FAQs)

1. Is voluntary life insurance pre-tax?

Voluntary life insurance premiums are usually paid with after-tax dollars, making them non-pretax. Nevertheless, select employers provide the choice of paying premiums through a Section 125 plan, which renders them pre-tax.

2. Can one cash out voluntary life insurance?

Voluntary life insurance, like other types of life insurance, typically cannot be cashed out by the policyholder during their lifetime. Moreover, it's important to note that accessing the cash value of a life insurance policy, whether through loans, withdrawals, or surrender, can have financial implications and may reduce the death benefit paid to beneficiaries.

3. Can I change my beneficiary for voluntary life insurance?

One can change their beneficiary designation anytime while the policy is in force. It's essential to keep your beneficiary information current to ensure the benefit goes to the intended recipient.