Employee optional life insurance provides supplementary coverage that enhances the death benefit employees receive through basic group life insurance. This valuable voluntary benefit allows workers to customize protection for their families within set coverage limits.
As employees navigate different life stages, optional life insurance can provide peace of mind that loved ones will be financially taken care of in the event of untimely death. This article will explore how optional life insurance works as an employee benefit, costs, eligibility, underwriting, and factors to consider when deciding on coverage.
What is Employee Optional Life Insurance?
Optional life insurance is an additional layer of term life insurance that employees can elect through their employer beyond the basic life insurance coverage. The death benefit is paid to the designated beneficiary if the insured employee passes away while enrolled.
Unlike basic life insurance, which provides a set amount of coverage, usually 1-2x annual salary, optional life allows employees to select a personalized amount of protection. Policies typically let workers choose a benefit in increments or units up to a specified maximum set by the employer’s plan.
For example, a policy may allow coverage for units of $10,000 up to a max of $500,000. So, an employee could select anywhere from 1 unit ($10,000) up to 50 units ($500,000) in optional coverage.
This supplementary protection can provide funds to cover significant financial obligations for dependents like:
- Outstanding debts – mortgages, personal loans, credit cards
- Final expenses – healthcare, funeral costs
- Daily living costs – rent/housing, utilities, food
- Education – tuition fees for children/spouse
- Loss of income – replace income employee provided
Optional life insurance is an employee-paid voluntary benefit, meaning premium costs are deducted from the employee’s paycheck. Employers may cover all or a portion of basic life premiums, while optional coverage is 100% employee-funded.
How Does Optional Life Insurance Work?
Eligibility: To qualify for optional life insurance, employees must first be enrolled under the employer’s basic group life policy. New hires usually wait 30-90 days before they become eligible for any supplemental coverage.
Employees also must be actively at work to apply for optional life coverage. Those on disability or leave of absence would typically need to return to active work status before becoming eligible to enroll.
Applying for Coverage: At new hire or during open enrollment periods, employees can select their desired amount of optional life insurance up to the policy maximum. For example, a plan with $100,000 max optional life might allow employees to choose units of $10,000.
The employee would decide how many units they want, which determines their total coverage amount. They may also need to designate primary and contingent beneficiaries.
Evidence of Insurability
When applying, employees may need to provide evidence of insurability by completing health questions or medical exams. This underwriting process allows the insurance carrier to assess and approve applicants for higher coverage amounts.
For many plans, employees can get a guaranteed issue amount (e.g. $100,000) without proof of good health. Electing any supplemental coverage over the guaranteed issue limit would require underwriting approval.
Coverage Duration
Optional life insurance coverage generally remains active while the employee stays enrolled under the employer’s group policy. If the employee ends employment or drops the coverage, they can typically convert the optional life policy to an individual plan.
Some group policies may reduce optional life benefit amounts after employees reach a certain age, such as 65. The reduction schedule should be detailed in the plan documents.
Naming Beneficiaries
Employees with optional life insurance will be asked to name primary and contingent beneficiaries as part of enrollment. These designated individuals receive the death benefit payout in the event the employee passes away.
Beneficiaries can be spouses, children, other family members, friends, organizations, estates, etc. Employees should review beneficiaries periodically and after major life events.
Is Optional Life Insurance Worth the Cost?
Optional life insurance can provide valuable supplementary coverage, but is it right for every employee? Here are some key factors to weigh when evaluating this voluntary benefit:
Coverage Gap: Review the basic life insurance amount through your employer. If it would not adequately cover financial needs for dependents in the event of your death, optional life can help close the gap.
Dependents: Employees with children, spouses, or aging parents depending on their income have more reason to consider extra coverage. Single employees with no dependents likely need less.
Debts & Expenses: Consider all outstanding debts, such as mortgages, loans, and final expenses, as well as projected costs for daily living, education, etc. Optional life provides funds to pay these obligations.
Income Replacement: Consider the income you provide to a spouse or family and the impact if you were to pass away. Optional life funds can help pay for longer-term costs like education.
Alternative Plans: Do you have personal life insurance policies or other assets (real estate, investments, savings) that would provide funds? Max out employer coverage first before buying other plans.
Health Class: If you have a major health condition that makes individual life insurance expensive, take advantage of optional life insurance that is medically underwritten when you are first hired. Premiums will be more affordable.
What Do Premiums for Optional Life Insurance Cost?
Premium rates for optional life insurance will depend on several factors:
- Age – Premium costs increase with age brackets, as older employees pose a higher mortality risk.
- Coverage amount – More optional life coverage equals more significant premiums.
- Gender – Statistically, women have lower mortality rates than men.
- Smoking – Smokers will pay higher premiums than non-smokers, sometimes significantly more.
- Health class – Applicants must pass underwriting; rates are higher for substandard health classes.
- Employer plan – Group policy features like plan maximums affect premiums.
Exact premium costs will vary among insurance carriers and group plans. However, employees can typically expect to pay around $0.05 to $0.30 per $1,000 in monthly premiums, depending on their demographics and other factors above.
Managing Optional Life Insurance
Employees should re-evaluate their optional life needs periodically, especially after significant life events:
- New dependents – Marriage, new baby, aging parents
- Change in debts – New mortgage, paying off loans
- Change in income – Promotion, new job, becoming single-income
- Change in health – New medical conditions diagnosed
For qualifying life events, employees can increase optional life coverage by submitting new evidence of insurability. To reduce or cancel coverage, notify your HR department. Be sure to update beneficiaries after significant personal changes.
When leaving an employer, find out about conversion or portability options to continue some group coverage on an individual policy. Term life rates will increase at older ages, so maintaining optional life can provide longer-term savings.
Optional Life Insurance Provides Customizable Protection
While basic life insurance gives foundational coverage, optional life allows employees to tailor protection amounts to their unique needs and family obligations. This supplemental death benefit can provide greater peace of mind that loved ones will be financially secure.
Consider the key factors around dependents, debts, income replacement, and health to determine if optional coverage suits your situation. Take advantage of this employer-sponsored option before shopping for potentially pricier individual policies.