Your guide to voluntary life insurance: Is it right for you?

Voluntary life insurance can be an invaluable safety net for employees and their families, but many people are unclear about how it works, its benefits, and whether it’s the right choice for their situation. In this guide, we’ll break down what voluntary life insurance is, how it differs from other types of life insurance, and what to consider before signing up.

What is voluntary life insurance?

Voluntary life insurance is a type of coverage that employers offer as an optional benefit to their employees. Unlike mandatory coverage that may be included in a group insurance offering or benefits package, this insurance is elective, meaning employees choose whether or not to participate and typically pay the premiums themselves. However, premiums are often at a reduced group rate, making this an affordable way to get life insurance coverage.

While it’s employer-sponsored, the coverage can vary depending on the plan design and the options the employer offers. Voluntary life insurance usually comes in two main forms: term life and whole life.

How does voluntary life insurance coverage work?

When an employer makes voluntary life insurance available, you have the choice to opt in during the benefits enrollment period. Your voluntary life insurance pays out a death benefit to your beneficiaries if you die while the policy is active. Depending on the policy type and coverage amount you select, this benefit can help replace lost income, cover funeral expenses, or pay off debts. 

Here’s a closer look at how a voluntary life plan operates:

• Enrolment: Employees usually enroll in voluntary life insurance through their employer’s benefits portal. The enrolment process may include a few basic health questions or a more comprehensive medical review, depending on the coverage amount.
• Premium payments: Premiums are deducted directly from your paycheck, simplifying payment. Thanks to group rates, these premiums are typically lower than what you’d pay for an individual policy purchased independently.
• Beneficiaries: As with other life insurance plans, you’ll need to name one or more beneficiaries. These individuals will receive the death benefit if you pass away while the policy is in effect.
• Death benefit: The primary feature, a lump-sum payment to your beneficiaries.
• Supplemental coverage: Some plans allow you to add riders, such as accidental death benefits or coverage for a spouse and dependents.

How much voluntary life insurance do you need?

Calculating how much voluntary life insurance you need involves considering your income, financial obligations, and future goals. A standard recommendation is to have coverage worth five to 10 times your annual salary. However, you should customize your coverage based on your specific situation:

• Income replacement: Estimate how many years of income your loved ones would need if you were no longer around.
• Debts: Include mortgage balances, student loans, and other financial liabilities.
• Future expenses: Think about your children's education, healthcare costs, or your spouse’s retirement needs.

Cost of voluntary life insurance

One of the most appealing aspects of voluntary life insurance is affordability. Because it’s employer-sponsored, premiums are usually lower than those of individual policies. Here’s what influences the cost:

• Age: Rates generally increase as you get older.
• Health: Healthier individuals may qualify for lower premiums.
• Coverage amount: Higher death benefits come with higher premiums.

Example: If your employer offers a plan where premiums cost $15 per month for $100,000 in coverage, this may be more economical than purchasing a similar individual plan.

What to consider before purchasing voluntary life insurance

So, why should you consider adding voluntary life insurance to your benefits package? It’s really a unique decision based on your financial situation, future outlook and employer’s program. To help in your decision making process we’ve broken down the decision criteria into a few key points you should consider: 

Advantages to voluntary life insurance

• Cost savings: Group rates often mean lower premiums compared to what you’d pay for a standalone policy. This can be especially beneficial if you have health conditions that might make individual coverage more expensive.
• Convenience: The payroll deduction method makes premium payments straightforward and hassle-free.
• Accessibility: Employers may not require a medical exam or have lenient health questions, making it easier for people with pre-existing conditions to get some level of coverage.
• Supplementary coverage: If you already have an individual life insurance policy, voluntary life insurance can provide an additional layer of financial protection for your loved ones.

Read more: What is supplemental life insurance?

Drawbacks of voluntary life insurance

• Lack of portability: If you leave your job, your coverage may end, although some plans offer the option to convert to an individual policy (at a higher cost).
• Limited customization: Employer-sponsored plans may not offer the same flexibility as standalone policies.
• Coverage gaps: Your employer’s plan might not provide sufficient coverage, especially for those with significant financial responsibilities.

Situational decision making criteria

1. Assess your financial responsibilities: Think about the people who depend on you financially and your long-term obligations. Do you have a mortgage, children who will need college funds, or other debts that could burden your family?
2. Consider your current health status: If you’re young and healthy, you might find better deals on an individual term life policy. On the other hand, if you have health conditions or want convenient payroll deductions, voluntary life insurance could be a cost-effective option.
3. Evaluate your personal coverage (if applicable): If you already have a personal life insurance policy, determine if the coverage amount is still enough. You might consider voluntary life insurance as a cost effective way to provide supplemental support for your existing policy.
4. Review your employer coverage (if applicable): Some employers provide life insurance at no cost to employees as part of a comprehensive benefits package. This basic coverage is generally limited, so opting for voluntary life insurance can help bridge any gaps.
5. Understand the terms: Be aware of the plan’s specifics, such as any age restrictions, coverage limits, or the portability of the policy if you leave your job.

Shop the market: While voluntary life insurance might be cheaper, it’s worth comparing against life insurance quotes for a standalone policy and speaking with a broker to see what makes the most sense financially. Depending on your situation you may be better off purchasing a new personal policy or adding on to an existing personal policy.

The bottom line: Should you get voluntary life insurance?

Voluntary life insurance is a convenient and often cost-effective way to secure additional financial protection for your loved ones. It’s particularly useful if you have dependents or financial responsibilities that your current life insurance policies don’t fully cover. However, it’s essential to understand the terms and limitations, especially the portability of the coverage if you change jobs.

Carefully compare your options and think about your long-term financial strategy. If you’re unsure, consulting with a financial advisor can help clarify whether voluntary life insurance aligns with your overall goals.

Also read:

• The price of life insurance in Canada
• Other types of life insurance
• Can you sell your life insurance policy in Canada?
• The cost of living is rising:Do you have enough life insurance?