It’s probably not a surprise I run into a lot of people figuratively scratching their heads about life insurance. Why is it so complicated? What do all the terms mean?
They just want to know enough about it to make a good purchase decision, not get married to it.
Life insurance can no doubt be befuddling, but not so today. We are going to peel back the onion on voluntary life insurance: what it is, how it works, and your options.
If you missed my recent article on supplemental life insurance, you can check it out here. Next, I'll write about group-term life insurance.
What is Voluntary Life Insurance?
Voluntary life insurance is often included in employee benefit packages alongside life insurance paid for by the company.
This is a good thing.
However, voluntary life insurance coverage is paid by the employee through payroll deduction.
What is the process to purchase a voluntary life insurance policy?
The process is simpler than you might think:
- Enrollment Period. Often called open enrollment, most companies offer it once a year, typically close to the company’s fiscal year-end or near the end of the calendar year.
- Determine Coverage. There are many ways to determine how much insurance to purchase. Here is an article I recently wrote on determining how much life insurance you need.
- Pay your Premiums. They will start coming directly from your regular paycheck. Easy peasy.
Another good piece of news is that, unlike employer-paid life insurance, voluntary life insurance that you pay for is what the insurance industry calls “portable.” We will get into this more.
What are the pros and cons of buying insurance from your employer?
Both sides have some strong points to make. Let’s take a quick look at each:
Pros:
- Convenience. Enrollment is typically straightforward with minimal paperwork. Premiums are taken from your paycheck.
- Group Rates. Employers negotiate monthly premium rates with insurance providers, which likely gives you better life insurance costs than you can get on your own.
- No Medical Underwriting. Many employer plans don’t require a medical exam or detailed health information.
Cons:
- Limited Options. The many different types of voluntary life insurance options simply don’t compare to what you can get from an individual life insurance agent.
- Little Personalization. You take what the company has available, which has been designed to meet the needs of the larger employee base.
- Portability. There is a chance you won’t be able to take some of the employee-provided insurance with you if you change jobs.
Definitely keep reading as the next section takes a little deeper dive into the portability issue and a problem faced by many.
What happens to my company life insurance if I change jobs?
That is a great question with more than one answer. It’s tricky and something I think many people overlook.
First, if you take the voluntary life insurance offered by your employer, it will, in most cases, be portable. Simply put, if you change jobs you can take the coverage with you. That’s great news (but always check this out before agreeing to purchase the coverage).
Second, if the company is providing you with life insurance at its expense, that is typically not portable. Let’s look at an example:
John has worked at Acme Manufacturing for five years. It’s a good job, but not something he plans on doing for the rest of his career.
He is participating in his company’s life insurance program, which provides him five times his annual salary in term life insurance at no cost to John. John makes $65,000 per year, which translates into $325,000 in group life insurance. Good news so far.
John is also participating in the company’s voluntary life insurance program by purchasing additional coverage of $150,000. That amount of coverage gives him a total of $475,000 in life insurance death benefit.
Here is John’s situation: He has a semi-pricey mortgage, a car payment, several credit cards with outstanding balances, and two kids not far from college age. The $475,000 payout won’t be enough.
So, to recap:
First, John is under insured for his beneficiaries. Almost 70% of his total life insurance coverage–the amount of life insurance the company is funding–is 100% dependent on John staying with Acme.
Second, John’s situation is not unique. He’s taking a risk by not having enough life insurance and then compounding that by having all of his life insurance with his employer. While he would likely pay higher premiums with outside insurance companies, he is taking a risk having all his life insurance with his employer.
Here’s the icing: there is no guarantee that Acme will always provide this benefit and certainly no guarantee John has employment for life at Acme.
Wow, that’s a lot to absorb.
In conclusion, if you find yourself in this conundrum, I strongly recommend that you consult a licensed agent to create a plan that will allow you to take more control of your life insurance.
Voluntary life insurance offers valuable, often affordable protection for your loved ones, and is definitely an option I would urge you to consider.
