What it means
Many employers give staff a basic amount of life insurance for free, often equal to one or two times annual salary. Voluntary life insurance lets employees top that up, and sometimes cover a spouse or children as well.
The employee picks the amount and pays the cost, normally through payroll. Because the policy is bought through a group scheme, the price is often lower than an equivalent individual policy, and the application can be simpler.
Employees may be offered a guaranteed amount without a health questionnaire if they sign up when first eligible. Higher amounts may require medical information.
Premiums are normally set by age band, so the cost rises as the employee gets older. Rates are quoted per $1,000 of cover per month, which makes it easy to compare options.
Smokers often pay more than non-smokers. There are some points to check before relying on the cover.
The policy is often tied to the job, so the cover may end if the employee leaves, although many schemes allow it to be converted into an individual policy or taken with the employee. Cover amounts may also reduce as the employee reaches certain ages.
For employers, the benefit costs nothing in premiums when staff pay for it, yet it improves the benefits package and helps with recruitment and retention. The employer's role is to run the enrolment process, deduct the correct premiums and pass them to the insurer on time.
Tax treatment varies by country and by who pays the premium, so employees should check how the premium and any payout are treated. For many families, voluntary cover is a simple way to top up protection, but it should be compared with individual policies, which are portable and not tied to employment.
In practice
Real-world examples.
Example
A teacher with two young children has a free employer benefit of one times salary. She adds voluntary cover to reach four times salary, so that her family could clear the mortgage if she died. The extra premium is taken from her monthly pay.
Example
A newly married software engineer joins a company and is offered guaranteed voluntary life cover of $200,000 with no health questions during his first 30 days. He accepts, because applying later would require medical underwriting.
Example
A warehouse supervisor adds voluntary spouse cover of $50,000 through his workplace plan. The monthly cost is small and deducted automatically. He later learns that the spouse cover ends if he leaves the company, so he asks HR about conversion options.
Formula
Calculation
Coverage amount = Annual salary x Salary multiple
Monthly premium = (Coverage amount / $1,000) x Rate per $1,000
An employee earning $60,000 chooses cover of 3 times salary, so the coverage is $60,000 x 3 = $180,000. If the illustrative rate is $0.10 per $1,000 of cover per month, the premium is ($180,000 / $1,000) x $0.10 = 180 x $0.10 = $18 per month. Over a year the cost is $18 x 12 = $216. If the employee dies while covered, the beneficiary receives $180,000.Case study
Seen in the real world.
Silverbrook Retail is an illustrative, fictional chain with 800 employees. The HR director found that staff valued life insurance but that the company-paid benefit of one times salary was often too low for people with families.
The company introduced voluntary life insurance through a group insurer, with cover of up to five times salary at age-banded rates, funded entirely by employees. HR ran short sessions explaining how to pick an amount and noting that cover is generally tied to employment.
Within a year, 38% of employees had increased their cover. The fictional programme cost the company only administration time, and exit interviews showed that staff saw it as a useful benefit. HR also arranged a reminder for employees about conversion rights when they gave notice. The payroll team ran a monthly reconciliation to confirm that deductions matched the premium invoice from the insurer. They found two small mismatches in the first quarter, both caused by late enrolment forms, and corrected them before any employee was left uncovered.
Watch out
Common mistakes.
- Assuming the cover continues automatically after leaving the employer, when many policies end with the job unless converted.
- Choosing a cover amount without calculating what the family would need, such as debts, living costs and education.
- Forgetting to update the beneficiary after a marriage, birth or divorce, which can send the payout to the wrong person.
Questions
People also ask.
Who pays for voluntary life insurance?
The employee normally pays the premium through payroll, although some employers contribute a share.
Is a medical check needed?
Often not for a guaranteed amount offered when first eligible, but larger amounts may require health information.
Is it better than an individual policy?
It is convenient and often cheaper, but an individual policy is portable and is not tied to employment, so the two should be compared.
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