Basic life insurance is a simple life insurance policy, often offered as part of a benefits package at a company along with group health insurance, paid time off and more. Companies often offer basic life insurance to their employees on a free or very inexpensive basis. To better understand what basic life insurance provides, here are a few things you should know. To evaluate how basic life insurance fits into your overall financial plan and whether you should think about other types of life insurance policies, consider working with a professional financial advisor.
Basic Life Insurance Definition
Life insurance is one of the most popular benefits companies offer to their employees. While there are several options available on the market, the most common options either require the employees to pay little or nothing at all. Additionally, a plan is typically a fixed dollar amount or a multiple of a person’s base salary. For example, an employer might offer each employee a $100,000 life insurance policy or two times the person’s base annual salary.
Basic Life Insurance Types
There are two main types of life insurance. The most popular type of policy for employer-sponsored life insurance programs is called term life insurance. Term life insurance covers a person for a specific term. In employer-sponsored programs, the term is limited to the time that a person works for a company. Employer-sponsored term insurance pays a particular sum, or death benefit, to the employee’s beneficiaries if he or she dies while covered by the term life insurance.
The other type of life insurance is called whole life insurance. Whole life insurance provides life insurance protection for the insured person’s entire life. Because most people do not work for a company for their entire careers, most companies will not provide whole life insurance to their employees. Some pension plans might offer life insurance to former employees, but as pensions go the way of the dinosaur, so do employers that offer whole life insurance to their employees.
Basic Life Insurance Cost
The employer typically covers the cost of basic life insurance. If an employee does have to pay for the cost of their life insurance, costs are generally meager due to the insurance being part of a group insurance policy.
Additionally, some employers offer their employees the option of paying for additional life insurance coverage. Typically for as little as a few dollars per month, employees can elect to pay for incremental life insurance additions.
Basic Life Insurance Advantages
Employer-provided life insurance gives employees access to life insurance who wouldn’t otherwise have it. It also provides coverage to employees who have private life insurance policies but may need extra coverage. Some of the advantages of basic life insurance include:
- Low to no cost: Employer-sponsored basic life insurance comes at little to no cost to employees.
- Protects people who aren’t eligible for private life insurance: If you can’t get private life insurance due to your health, you may be able to get life insurance through your employer’s group life insurance policy.
- Tax benefits: Employees covered by an employee-sponsored policy only have to pay the federal taxes on any life insurance coverage payment that exceeds $50,000 in benefits.
Basic Life Insurance Disadvantages
Although employer-sponsored basic life insurance can be advantageous for many people, there are some disadvantages as well. Some disadvantages include:
- If you leave the company, you lose coverage: Most employer-sponsored basic life insurance coverage is term life insurance. Therefore, when you leave your company, you will no longer have life insurance coverage for retirement or a new job.
- One size doesn’t fit all: Each employee will have different needs when it comes to life insurance. Therefore, employer-sponsored life insurance might be nice to have but may not be a match for everyone’s needs.
- It can be expensive: Group insurance has increased in cost over the years. Therefore, some employers might pass some of the costs on to their employees.
Is Basic Life Insurance Enough?
Everyone has different needs when it comes to a life insurance policy. Those different needs can be seen in the dollar value that’s needed and the specific type of policy that’s needed. Most people need far more than the $50,000 to $100,000 that many companies offer. It’s recommended that you take the time to calculate your need for life insurance. Figuring out your coverage need will help ensure you have enough.
To calculate your need for life insurance coverage, consider how long you’d like to support your beneficiaries. You may also want to consider any upfront costs they may have without your income. While personal life insurance will be an out-of-pocket expense, it is often more comprehensive than basic life insurance.
Each individual has unique needs when it comes to life insurance. There’s not one specific type that’s right for everyone. Be sure you understand the various types of policies that are available.
The Bottom Line
Basic life insurance or employer-sponsored life insurance policies are typically offered to employees at a low or no cost. While these policies are often helpful for boosting a person’s total life insurance coverage or providing coverage to people who might not otherwise be eligible for life insurance, they are not typically enough coverage. Therefore, employees are encouraged to take advantage of free life insurance coverage and purchase a policy that meets their family’s needs.
Life Insurance Tips
- Partnering with a financial advisor to determine the right amount of coverage is a smart move because they can help you make the right financial choices for your long-term goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Usually, you can calculate the right amount of life insurance by factoring in your income. Depending on the other resources you have to give your dependents after your passing, you may not need to replace 100% of your income. Also, one of the key decisions you’ll need to make is whether you should have permanent life insurance or term life insurance.
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