How Does Voluntary Life and AD&D Insurance Work?

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There are some companies that provide some helpful benefits outside of traditional health insurance, such as disability insurance, a retirement plan, a 401K, and other options. If you are insured through your employer, chances are good that you also have the opportunity to enroll in voluntary life insurance and Accidental Death and Dismemberment (AD&D) plans.

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As with any type of life insurance plan, voluntary life and AD&D is a financial tool that provides a sum of money to your beneficiary upon your death. They provide you with the ability to make sure that your family will be financially secure if you happen to pass away.

However, what defines voluntary life and AD&D? What are the features and benefits, and is it worth enrolling? Below, we define these financial options to help you decide whether it is worth enrolling if and when they’re offered to you at work.

What is Voluntary Life Insurance? 

Voluntary life insurance is an employee benefit offered by many employers. In consideration for premiums paid, the employee’s named beneficiaries can receive a death benefit from the insurance company if they die while the policy is in force.

In addition to offering this insurance to the employee, many companies also allow employees the opportunity to purchase policies for their spouse and children if they’d like.

The big benefit of voluntary life insurance is that it is a “generally guaranteed issue” up to a limit on the policy’s death benefit. Guaranteed issue means that no medical exam is required and that applicants won’t be denied coverage because of a pre-existing illness. This can be a useful benefit for employees suffering from a medical condition that has prevented them from being issued coverage when applying on their own.

Many employers offer a base level of coverage at no cost to the employee. The face amount of the policy is often one times their salary. If the death benefit exceeds $50,000, IRS rules state that the amount of money the employer pays for the excess amount is taxable income to the employee.

If an employee needs a greater benefit than that which is offered free of charge from the employer, that’s when they will purchase voluntary life insurance and pay the cost of the additional death benefit. This is done when they are first eligible for benefits as an employee or during their company’s open enrollment period.

As they do with any life insurance policy purchased individually outside of work, voluntary life policies can vary and have different terms and conditions. The employer usually negotiates these with the insurer offering the policies.

One key feature that employees should make sure to consider is whether the coverage is portable should they leave their employer. This can vary from plan to plan. If this is an important issue for the employee because of past medical problems, they should take the time to verify portability when they are deciding whether or not to enroll in coverage.

Types of voluntary life insurance

Voluntary life comes in two forms: term life insurance and whole life insurance.

Voluntary term life insurance is the most common type of voluntary life insurance offered by employers. Unlike whole life insurance, there is no savings element with term life insurance – it consists purely of a death benefit. This type of insurance offers lower premiums than whole life.

Some employers will offer their employees voluntary life insurance consisting of a whole life insurance policy. They usually do this to encourage their employees to save money through the policy, which is a feature of this type of policy. Also, whole life insurance premiums remain level throughout the life of the policy.

In contrast, term policies can increase in premium every five, 10, or 15 years, causing the employee to re-enroll in coverage when the premium increases.

What does voluntary life insurance cost and who pays for it? 

Like all life insurance, the cost of voluntary life insurance will vary, depending upon the employee's age. The older you are when you apply for life insurance, the higher the premium will be, which is why financial advisors recommend that you purchase life insurance when you’re younger.

A good example of the cost of voluntary life insurance for an employee would be comparing the cost of a $100,000 term life policy for two employees, one being 25 years old and the other being 55 years old. In this example, the 25-year-old employee would pay a semi-monthly premium of $3.90, while the 55-year-old employee would pay a semi-monthly premium of $45.50.

Usually, the employer will pay for a base benefit amount of one times their salary or up to $50,000 to keep the benefit from being taxable to the employee. The employee is responsible for any of the cost of coverage with a face amount of insurance greater than that provided by the employer.

You may be unsure of how much life insurance you may need when enrolling in your voluntary life insurance plan at work. A good rule of thumb is six to 10 times your annual income, taking into account inflation. This amount should be ample enough to help maintain your family’s current lifestyle.

What’s the difference between voluntary life insurance and basic life insurance? 

As we’ve discussed, voluntary life insurance is life insurance purchased by the employee as part of a group insurance plan and is paid for by the employee through payroll deduction.

On the other hand, basic life insurance is life insurance obtained at work and is typically paid for by the employer. Like voluntary life insurance, basic life insurance gives employees with pre-existing health conditions access to life insurance they wouldn’t qualify for independently. Since it’s rarely portable if you leave your employer, it’s a wise move to purchase an individual policy while you can qualify for it.

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What is Voluntary AD&D Insurance? 

Accidental Death & Dismemberment (AD&D) insurance pays a lump sum benefit to a beneficiary in the event of a covered accident. These accidents are defined as unforeseen and are fatal or dismembering. Deaths attributed to prior medical conditions aren’t covered under an AD&D policy.

Unlike Workers Compensation which only covers work-related accidents, AD&D covers accidents that happen anywhere, such as on the road or at home. Insurance companies tout AD&D insurance as a way to round out a benefits package that offers life, disability, and critical illness insurance.

AD&D insurance may include coverage for employees or employees and their dependents. It usually provides 24-hour coverage no matter where the covered accident happens.

It covers:

  • Loss of life
  • Loss of speech
  • Loss of hearing
  • Loss of a hand, foot, or sight
  • Loss of thumb and index finger on either hand
  • Loss of movement

Your AD&D policy will cover you in the event of a covered injury, paralysis, or death resulting from a covered accident.

Most insurance companies consider death from car accidents, slips, choking, machinery, drowning, and any other circumstances which couldn’t be controlled to be accidental. Most insurance companies will consider death from hazardous hobbies such as parachuting, hang-gliding, and scuba diving to be accidents that could have been controlled by the insured, and therefore are not covered by the AD&D policy.

The benefit and cost of AD&D insurance

If you’ve been issued AD&D insurance, if you die or are dismembered by a covered accident, your beneficiaries will receive two times the face value of your base policy. For example, if your base policy has a face value of $100,000 and you die due to a car accident, your beneficiaries will receive a $200,000 death benefit.

The cost of AD&D insurance is lower than that for traditional life insurance because the coverage is limited to accidents only. The premiums are tied to the amount of basic voluntary life insurance you purchase. Rates will vary from insurer to insurer and can start as low as $4.50 per month for $100,000 of coverage.

You also won’t need to qualify health-wise for AD&D insurance – you just have to meet the age requirement of being between ages 18 to 70 or 80. You may forfeit your coverage when you leave your job.

How Do You Know If You Need Voluntary Life or AD&D Insurance? 

A significant benefit of obtaining life insurance at work is convenience. You may know that you need life insurance, but you just haven’t gotten around to getting it yet. Getting your life insurance through your employer can be an easy way to handle this.

If cost is a big factor in your decision, getting your life insurance at work usually works out in your favor as it can be free or inexpensive, especially when you’re younger.

You also need to get your coverage at work if you’ve been declined for coverage elsewhere since it’s guaranteed to be issued to you. People who have diabetes, a mental disorder, or any other of a large number of pre-existing conditions let out a sigh of relief when they find out that they can provide a death benefit for their loved ones.

Getting your life insurance through your employer has several drawbacks. If you lose your job, you’ll likely lose your coverage, and you’ll have a gap in coverage while you’re between employers. In addition, voluntary life insurance is usually higher in cost than if you purchase it directly from a life insurance company. 

Choosing to Enroll in Voluntary Life and AD&D Insurance

You normally enroll in a group health insurance plan because of the cost and the fact that the insurance company will cover you regardless of pre-existing conditions. Voluntary life insurance can be helpful because it comes with those same advantages that group health offers – guaranteed issue life insurance at a competitive rate. 

As with any insurance purchase, take the time to understand all of the policy rules and restrictions and do some price comparison between the group rates and what you can get on your own. The annual savings might be worth the effort.

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