Voluntary life insurance: A guide for employees

What is voluntary life insurance? It's a life insurance policy often referred to as voluntary, supplemental, or optional life insurance, that you purchase voluntarily at work. In 2024, 51 percent of LIMRA survey respondents said they have some type of life insurance: Of those insured, 55 percent have only individual coverage, 25 percent exclusively have workplace coverage, and 19 percent have both.¹

While there’s no doubt that voluntary life insurance can be a valuable workplace benefit, it works a little differently than individual life insurance. What are the advantages? The disadvantages? And should you consider it? This article can help you decide by answering three questions:

• How does voluntary life insurance work?

• What are the different types of voluntary life insurance policies?

• Is voluntary life insurance a good value?

What is voluntary life insurance and how does it work?

Many companies and organizations make group life insurance available to employees as a workplace benefit. Group life insurance is exactly what the name implies: life insurance purchased for a group of people – in this case, you and your co-workers. These policies typically offer lower rates than individual policies, for the same reason that goods bought in bulk are more cost-effective than items purchased individually. Generally speaking, there are two forms of workplace group life insurance; either one or both may be offered to employees:

• Basic employee life insurance – A specific amount of coverage typically offered to employees included with their benefits package.

• Voluntary employee life insurance – Optional insurance for employees, their spouses, or children, paid for via payroll deduction.

Like other life insurance policies, voluntary life insurance pays a death benefit to your beneficiaries if you pass away while the policy is in effect. The death benefit can be used to help pay for household expenses, child care costs, housing, education, or anything else your beneficiary deems necessary.

The death benefit is not subject to income taxation at payout.  However, how the premium is paid for while you are working and covered by the life plan, may have tax implications.  Talk to your employer or tax advisor about these potential tax implications.²

Who can sign up, and when:

There are usually eligibility requirements for workplace life insurance. For example, you may be required to work at least 20 hours per week. You don’t have to sign up for basic employee life, but because voluntary life is optional, you have to sign up for it, and there will likely be limitations on when you can do so. If you’re a new employee, you’ll typically have a few weeks to enroll; after that, you’ll probably have to wait until the next annual benefits open enrollment period to sign up or increase your policy amount. Had a recent change in family status? Most plans will let you sign up for coverage (or change it) after certain life events – such as marriage or the birth of a child – without waiting for open enrollment. Finally, if your company has “evergreen” (i.e., year-round) enrollment, you won’t have to wait for a sign-up period – so check with your HR department.

How much is available:

Every company negotiates its own group policy, so the amount of coverage you can get will differ from one employer to the next. Sometimes your choices will be in rounded dollar increments, such as $10,000, $20,000, and so on; other times, it will be a “multiple of salary” – 1x your salary, 2x your salary, etc. Some plans also let you purchase coverage (typically at a lower amount) for a spouse or even for children, as long as you purchase for yourself.

Medical exam requirements:

Voluntary life insurance plans are usually guaranteed issue up to a certain limit, which means you don’t need to provide medical documentation or answer health questions – your acceptance is automatic. If you apply for coverage (or are looking to increase it) above the guaranteed-issue limit, you will have to provide medical documentation or provide evidence of good health. Your enrollment site or packet should state what the guaranteed-issue limit is, and if you have questions, contact your HR department.

Portability and conversion:

"Portability" means you can take your existing life insurance coverage with you if you leave your company. "Conversion" means you are allowed to turn or "convert" your group term life insurance coverage to a permanent individual whole life policy.

One advantage of voluntary life insurance is that it’s among the few benefits that can be continued after your employment ends – even if your health worsens to the point that it would be difficult to qualify for another policy. However, while many voluntary plans are portable, others aren’t: to avoid unpleasant surprises, you should find out whether your company’s plan is portable before you sign up. The same applies to the ability to convert a life insurance policy. For example, Guardian offers the ability to convert its basic and voluntary term life insurance products.

What are the different types of voluntary coverage?

There are two basic types of life insurance: Term life insurance and permanent life insurance. A term life insurance policy provides coverage for a specific number of years. Term life is sometimes called “pure life insurance” because, unlike whole life insurance, there’s no cash value component to the policy – once the term is over, there’s nothing left.

Permanent life insurance (also called universal or whole life) is designed to provide protection that lasts your entire life. Unlike term life insurance, permanent life insurance includes a cash value component, which helps make coverage last indefinitely while providing other financial benefits.³ A portion of your premium dollars can grow tax-deferred. Over time, it builds into a usable amount that can be cashed out or borrowed against – but the entire death benefit is immediately payable from the first day you have the policy.⁴ Most employer voluntary plans are term life insurance, but some also offer permanent life insurance.

Voluntary term life insurance

Voluntary term life insurance coverage is typically offered on a year-by-year basis, so you can choose to renew, change, or cancel each year (i.e., during open enrollment). While a term life insurance policy can be more affordable than a whole life policy, in a voluntary life plan, your rates will go up with time – either annually or every few years as you enter a new age bracket. Also, like other kinds of term coverage, a voluntary term life policy is a “pure” life insurance product – there’s no cash value component.

Voluntary permanent life insurance

This type of coverage is often used to complement voluntary term life coverage. While the cost for a given level of benefit is higher than term at first, your rates never increase.⁶ This lets you lock in pricing for a smaller, life-long policy that is portable and can help cover final expenses and other needs after children are no longer dependent on your support. Voluntary permanent and whole life policies can also build tax-deferred cash value that can be used for loans or withdrawals during working and retirement years.

Accidental death & dismemberment insurance

This is a more focused form of coverage (also called AD&D) that complements life insurance by providing payments for accidental death and injuries. It can be offered as a stand-alone policy or as an extra-cost rider.

Is voluntary life insurance a good value? And is it enough?

Typically, voluntary life insurance is a good value that’s worth considering. However, it may not always be enough. Here’s why.

We’ll start by noting a couple of caveats about value. While group life insurance rates tend to be lower than standard individual rates, they aren’t always the lowest rates available. While you are effectively buying “in bulk,” you’re also buying as a member of a larger group of people who are in varying states of health. For many people, this won’t matter, but if you are much younger and healthier than the average group member, you may well be able to find lower rates as an individual.

Remember also that voluntary term rates typically go up every 1-5 years, but if you buy insurance as an individual, you can get a “level” term policy in which rates stay the same for 20, even 30 years. So while voluntary group life insurance is easy to apply, qualify, and pay for (via convenient payroll deduction), it can cost more than an individually underwritten policy (i.e., a policy that you have to get a medical test to qualify for). Voluntary coverage also may not provide enough protection for all your needs.

How much life insurance is enough?

The amount of life insurance coverage someone needs depends on a variety of factors, including marital and health status, financial dependents, household income, assets, and debt. Industry guidelines often suggest that individuals should have enough life insurance to replace, at minimum, 7 to 10 times their annual salary. More conservative guidance suggests even higher levels of coverage up to 20 times your annual salary.³

• Consider plus college expenses - If you add $100,000 - $150,000 for each child, that can help ensure they can have the education you want for them.

• Consider using the DIME formula⁷ - DIME stands for Debt, Income, Mortgage, and Education. Total your debts, mortgage, and college expenses, plus your salary for the number of years your family needs protection (e.g., until the children are out of the house).

• Human Life Value

Some financial professionals calculate the amount you need using the Human Life Value⁸ philosophy, which is your lifetime income potential: what you’re earning now, and what you expect to earn in the future.

In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits.

As with every individual, the amount of recommended insurance you purchase depends on many factors. A simple way to get that number, however, is to multiply your salary times 30 if you are between the ages of 18 and 40. The calculation changes based on your age group, so please refer to the chart:

What if your company doesn’t offer enough? There are a couple of different ways to add to your voluntary life coverage. Start by shopping for individual term life insurance policies on your computer, tablet, or smartphone. Many companies, including Guardian, make it simple to get an affordable term life insurance quote.

Or, take a deeper dive into the issue by talking things over with an insurance professional who can not only help calculate your need, but guide you to the right solution for your needs – which may include individual life insurance coverage should you have insurance needs in excess of what's available through your employer. If you don’t have someone to discuss insurance with, Guardian can help you find a nearby financial professional who will take the time to learn about your situation and explore a variety of term, universal, and whole life insurance options to round out your needs.

Frequently asked questions about voluntary life insurance

Should you get voluntary life insurance?

For many people, the answer may be yes – you can enjoy attractive group coverage rates, it’s easy to sign up for, and with convenient payroll deductions, you’ll never miss a payment.

What is the difference between basic life insurance and voluntary life insurance?

Both kinds of coverage are offered through the workplace. Basic employee life insurance only provides a specific amount of coverage, but it is paid for by the employer at no cost to you; voluntary life insurance is optional coverage that you pay for.

Can you borrow from voluntary life insurance?

It depends on what kind of voluntary life insurance you have. Voluntary term life insurance isn't like a whole life insurance policy as there is no cash value to borrow against. However, voluntary permanent life insurance can have a cash value component that grows tax-advantaged and can be used for loans or withdrawals, before or after retirement.