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Do you live in fear of being forced to buy life insurance? Most people don’t. Although you have to admit, there are some pretty sleazy insurance salesmen out there pushing bad products onto people.
But when you hear a term like voluntary life insurance, you may be wondering, Um, isn’t all insurance voluntary?
Yes. Yes, it is. But in this case, voluntary life insurance means the kind of life insurance you can opt in or out of as an employee benefit. Cool, right? Well, we do love and recommend life insurance for most people—and it’s possible you’ll get some good and affordable coverage as part of a benefits package. But there are also a couple of details you’ll want to dig into first, like whether the life insurance your employer offers is term life or whole life, plus a few other quirks you should know about.
Let’s find out all there is to know about voluntary life insurance so you can decide if you’re opting in or out.
How Does Voluntary Life Insurance Work?
Voluntary life insurance (sometimes called group life insurance) is coverage many companies offer as an optional employee benefit. As with all life insurance, it includes a death benefit to provide for the employee’s family if the employee dies.
The life insurance your company offers can come in two forms—term life coverage (the kind we always recommend) and whole life (which you should run away from at top speed). Whole life sucks because it’s complicated, expensive and you have to pay for it forever. On the other hand, term life is affordable, cheap and easy to understand: It does the simple job of replacing your salary. If you get voluntary life insurance at all, only go for term life.
Compare Term Life Insurance Quotes
Since this kind of benefit is sponsored by your employer, the premiums are typically cheaper than you’d find if you’re shopping on your own. But it’ll also only provide about a year or two of salary coverage. And that’s way less than you need. The whole job of life insurance is to replace—and we mean really replace—your income if you die. We recommend getting coverage that pays out 10–12 times your income and only lasts for 15 or 20 years. Voluntary life insurance almost never provides enough coverage to fully check off that box.
If your employer offers a standard minimum death benefit, it’s sometimes called guaranteed issue because there’s no medical exam required to participate. Sweet! But like we said, most voluntary life insurance falls way short of paying out 10–12 times your salary.
Sometimes you can get a larger life insurance payout if you choose to have a bigger payroll deduction for more coverage. Amounts come in multiples of your salary, with a slightly higher premium every time you level up. But if you go for more coverage, you’ll probably be required to prove you’re healthy enough to qualify for it.
Remember, you don’t need life insurance forever. If you follow Ramsey’s 7 Baby Steps (which is the plan we recommend to help you build wealth), you’ll become self-insured and won’t need a policy to replace your income. That’s one big reason we never recommend you get any form of permanent life insurance (the other is that it’s way too expensive). So, if your employer only offers a whole life option for voluntary life insurance, don’t even consider it.
But if they do offer a term option, compare what you’d pay for the standard term life benefit through your employer with options you can buy through an agent. If the voluntary term policy is a good deal, go ahead and opt in for a policy that’s set to last for 15 or 20 years (the typical amount of time people have dependents while they’re building up their investments). You’ll probably need an additional individual policy to have enough coverage for 10–12 times your income. But by going this route, you’ll save a lot of money, and you can invest the difference for your family’s future while knowing they’ll be provided for no matter what happens to you.
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Voluntary Spouse Life Insurance
If your employer offers voluntary life insurance, they may include an option to add your spouse or dependents to the coverage. Then, if your spouse or child passes away, you (the employee) would be the beneficiary.
While we love the concept of you having life insurance both for yourself and your spouse, it’s not a coverage type we recommend for children. But just so you know how the kid version would work if you signed up: most voluntary policies will require at least one parent to be on the policy before you can add a dependent. If you decide to get a voluntary term life benefit and still want to add a dependent, be sure to check the plan’s rules.
Accidental Death and Dismemberment Coverage
Along with voluntary life insurance, another coverage type you’ll often hear about from employers is accidental death and dismemberment (AD&D). Avoid this trap completely! It might be offered as a rider to the main policy or as a separate policy. Either way, it’s a rip-off. Why?
Because anything AD&D is designed to cover you for—like certain kinds of accidental death or losing a limb—is already covered in other ways. Life insurance covers any kind of accidental death already. And other injuries are covered with health insurance or long-term disability insurance. AD&D is a marketing ploy that uses fear to con you into buying extra coverage you don’t need.
Other Things to Consider About Voluntary Life Insurance
Voluntary life insurance is sometimes portable. That means even if you leave your employer, you can take the coverage with you while paying for it on your own. But that’s usually only available for whole life policies. You shouldn’t ever sign up for the whole life version. And if you did, why would you want to keep it going?
Qualifying life events can make you eligible. If an employer offers voluntary life insurance, you’ll probably be able to sign up as soon as you’re hired. But you don’t have to sign up right away. And (like with many benefits) the option will usually come back around at open enrollment time. But if voluntary life doesn’t fit your needs when you start, other life events—like marriage, divorce, or the birth or adoption of a child—could qualify you for extra chances to sign up.
The Bottom Line
To sum it all up, voluntary life insurance might be a way for you to save some money on part of your life insurance needs. But it won’t do more than put a dent in the amount of life insurance you really need. We recommend level premium term life insurance with coverage that’s 10–12 times your income and a term that’s 15–20 years in length.
Remember, life insurance has just one job: to replace your income if you die. It’s there to provide for your loved ones, not to make them rich. If you’re in the market for new life insurance or want to talk to an expert, we recommend RamseyTrusted partner Zander Insurance.
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