What is Voluntary Life Insurance?
Voluntary life insurance is a financial security and protection policy that provides a cash payout to a beneficiary or beneficiaries upon the death of the policyholder who is insured. It represents an optional benefit that is offered by employers to their employees as part of a comprehensive group life and health insurance plan.
In life insurance, the employee will generally pay a regular premium – usually every month. The premium is the payment for guaranteeing the cash payout upon the employee’s death.
Understanding Voluntary Life Insurance
Life insurance is an insurance tool that is used to provide a beneficiary with a sum of money upon a policyholder’s death. Insurance is the contractual arrangement in which an insurer will promise some form of protection against an event or loss in exchange for regular premiums. Life insurance is very common for people who wish to ensure that their family will be financially secure if they happen to pass away.
Life insurance is a legally binding contract in which an insurer, usually a life insurance company, will sell a policy to an individual who wishes to receive a cash payout upon their death, directed towards a beneficiary.
A beneficiary represents a person who gains an advantage from a trust, will, or life insurance policy. Beneficiaries are usually the policyholder’s spouse, children, grandchildren, or other family member; however, the beneficiary can be anyone who is designated as such.
Voluntary life insurance is offered by employers to employees and is usually offered at a discount to normal life insurance rates. The reason is that employers can negotiate better terms since they are representing many potential policyholders. By grouping many individuals together and negotiating as one entity, employers gain more buyer power and economies of scale.
How It Works
Insurance companies will provide voluntary life insurance with added benefits and riders. A rider is simply an insurance policy provision that can add benefits or change terms of the policy over time. Examples of benefits can include:
- Options to upgrade plans
- Portability (continuing life insurance coverage even after termination of employment)
- Accelerated benefits
- Option to purchase plans for related members (spouse, dependents)
- Option to deduct premiums directly from salary
Types of Voluntary Life Insurance
Voluntary life insurance can be provided in two general forms:
1. Whole Voluntary Life Insurance
Whole voluntary life insurance protects the life of the policyholder for the entirety of their life. If whole voluntary life insurance is elected for, the policyholder will be protected for their entire life.
Also, the policyholder’s spouse and dependents may be protected for their entire lives as well, although at smaller payout amounts. The premiums are typically a little bit higher, but they are locked in and cannot be increased in the future.
2. Voluntary Term Life Insurance
Voluntary term life insurance, also known as group term life insurance, is a policy that only offers protection for a limited period of time. The period may range from 5, 10, or 20 years. Premiums are generally less expensive under the voluntary term type of life insurance; however, the premiums may increase if the policy is renewed.
Some individuals may use both forms of voluntary life insurance in combination. For example, if an individual takes out a whole voluntary life insurance coverage, but determines that it may not be enough if they were to die within five years, then they may elect to add a voluntary term life insurance on top of their existing coverage. It can happen there are young dependents that may not be financially secure in the short term.
Structure of Life Insurance
Life insurance contracts are made up of three essential components:
1. Death Benefit
The death benefit is essentially the face value that is guaranteed to beneficiaries in the event of the death of the policyholder. It represents the cash payout that is estimated to be needed by the beneficiaries.
Premiums are the money paid by the policyholder for the insurance coverage. The insurer will determine the amount of the premium by estimating a fair value using actuarial science. Actuarial science is a discipline that uses mathematical and statistical concepts to assess risk.
For example, the life expectancy of the policyholder must be estimated. It is a crucial estimation that is based on various factors, such as the age of the policyholder, health condition, occupational hazards, etc.
3. Cash Value
The cash value acts as a savings account that a policyholder can use throughout the life of the insured individual. It can also be used to pay premiums or upgrade the insurance plan.
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