What Is Voluntary Life Insurance?
Unlike with health insurance, employers are not required to offer life insurance to their employees. Voluntary life insurance is an employee benefit paid for either by an employer entirely or by premiums being deducted from your paychecks. Even if you pay a premium from your salary, these policies are still less expensive than an individual life insurance policy and are a great perk to any job.
Commonly called group life insurance, voluntary life insurance covers unrelated people who are members of the same group. If a member of the group passes away, the policy pays out the benefit amount to the beneficiaries. Though most often seen in business-related groups, voluntary life insurance covers other groups that fall within certain guidelines.
To qualify for group insurance, the sole intention of the group cannot be to purchase life insurance, such as a group of friends or family members. Eligible groups include employer/employee groups, labor union groups, association groups, and multiple employer trusts.
The most everyday type of group life insurance is purchased by employers for the benefit of their employees. Although permanent group life insurance policies are available, most employers use a form of annually renewable term life insurance. The National Association of Insurance Commissioners (NAIC) created the model for group term life insurance followed by most states.
Requirements set by the NAIC for group term life insurance include:
The group must cover at least 10 people under the master policy.
Insurance must be bought for the welfare of the employees, and employers can’t be beneficiaries.
The master policy goes to the employer, and employees receive a certificate of insurance.
Medical exams are generally not obligatory, and premiums are based on the group, not the individual.
Characteristics of Voluntary Group Life Insurance
Group life insurance plans can be funded entirely by the employer (or a sponsor that holds the master policy), or premiums may be split between participants and the employer. If the policy is funded completely by the employer, it is called a noncontributory plan. When an employee pays a part of the premium, it is a contributory plan.
Employer group life insurance plans are most commonly noncontributory and are called basic group life insurance policies. With this type of group policy, 100 percent of eligible employees must be covered. Contributory group life insurance policies are voluntary—employees are not required to participate. Typically, the required participation of the group for contributory plans is 75 percent.
Group life insurance policies have standard provisions. These provisions include a grace period for paying premiums after the due date, conditions in which the insurer may ask for evidence of insurability, incontestability after two years, the right for policyholders to choose their beneficiaries, and the right for policyholders to convert the policy to an individual policy without evidence of insurability.
After you leave your job, group life insurance coverage usually ends. If you are uninsurable by the time you leave your job, it would be impossible to qualify for an individual life policy. A group life insurance plan ‘s conversion provision allows policyholders to convert their group coverage to individual coverage with an equal death benefit and without evidence of insurability.
The standard conversion provision allows the policy to be converted to a whole life insurance policy. When insurers allow you to convert your policy to a term policy, often called “porting,” your policy is a portability policy. Porting or converting your policy must be requested within 31 days of leaving your job. During the 31 days, your group life insurance policy is still in effect.
Since group life insurance covers a minimum of 10 people, underwriting focuses on the entire group, not the individual. Group rates rely on a combination of healthy participants and those who might be uninsurable. This explains why minimum participation is required. The law of large numbers shows the larger the group, the easier it is to predict future losses.
