Many employers offer basic life insurance to their employees as part of a benefits package. Basic life insurance is a type of group life insurance that is provided to employees at no or very low out-of-pocket cost. Insured individuals can expect that their beneficiaries will receive a limited and predetermined death benefit if the policyholder passes away during the coverage term.
Understanding what basic employer-sponsored life insurance is and how it works can help you determine if you need to include this kind of life insurance coverage in your financial plan.
What Is Basic Life Insurance?
Basic life insurance is a form of group life insurance, wherein an insurer enters into a contract with an entity or organization, such as an employer, to provide low-cost coverage to the entire group.
Employers that offer basic life insurance generally provide policies with a specific death benefit amount, which is usually set as either a dollar amount or a multiple of the employee’s annual salary. In many cases, employees will pay nothing for the basic life insurance coverage. However, even if employees are required to contribute to the cost of their basic life insurance policy—usually through a payroll deduction—the premium costs tend to be affordable, as the insurer bases its prices on the risk of the entire group, as opposed to only the person being insured.
You can expect basic life insurance policies offered through an employer to be guaranteed, meaning they require no medical questions or exams to qualify. However, some employers limit their basic life insurance offerings to employees under 65, so be sure to read the fine print.
How Basic Life Insurance Works
When employers offer basic life insurance as an employment benefit, the organization holds the insurance policy, and the individual employees each receive a certificate of insurance. Basic life insurance is usually issued as annual renewable term life insurance, which means your employer can renew it every year. Basic life insurance coverage typically remains in force for the duration of your employment.
Depending on the insurer, you may be allowed to keep the policy (known as porting insurance) or convert it to a different type of life insurance after your employment is terminated, as long as you take over paying the premiums. But this tends to be a much more expensive option than finding an individual policy on your own.
Do I Need Basic Life Insurance?
Basic life insurance is easy to qualify for and often costs you little or nothing. Most employees who are offered basic life insurance will want to take advantage of the opportunity, as this inexpensive (or free) perk can help provide added peace of mind.
However, having basic life insurance does not mean your life insurance needs are fully covered. For example, your employer could terminate the policy without warning, which could leave you without coverage if this is your only policy.
In addition, the level of coverage offered by most basic life insurance policies is unlikely to be sufficient for your life insurance needs—for instance, one or two times your annual salary. It is, in a word, basic, and may not offer a large enough death benefit to cover your family’s financial needs, like paying off a mortgage or paying for your children’s college tuition.
It’s better to have basic life insurance than no life insurance, but your best strategy is to calculate the amount of life insurance you need. Going through this exercise will help you make sure you have enough coverage to take care of your dependents if something happens to you.
Basic Life Insurance vs. Voluntary Life Insurance
Many employers allow employees to purchase voluntary life insurance, also known as supplemental life insurance, as a way to “top up” their basic life insurance policies. Voluntary life insurance allows you to buy additional life insurance coverage at a lower rate than you would likely find when buying insurance outside of your group plan. That means employees could stack voluntary life insurance on top of their basic life insurance to increase their coverage for less than they’d pay if they bought a separate policy on their own.
Like basic life insurance, the voluntary type is generally guaranteed up to a certain limit, making employer-sponsored life insurance available to people who may not otherwise qualify for a policy.
Voluntary life insurance may also allow you to purchase spousal or dependent life insurance policies at the group rate, although the benefit amount for such policies tend to be very limited.
Like basic coverage, voluntary coverage may not be portable if you leave or lose your job and could be terminated if your employer owns the policy. It’s best to have another life insurance policy in place with sufficient coverage outside of your employer’s plan, if possible.
- Basic life insurance is life insurance sponsored by workplaces and is generally guaranteed with no medical questions or exams.
- Insurers offer organizations a lower group rate for premiums, meaning basic life insurance is offered at either no cost or low cost to employees.
- Basic life insurance may be portable if the employee takes over paying premiums after leaving their job, depending on the insurer and the specific policy.
- The death benefit for basic life insurance is generally modest, and this kind of insurance is unlikely to be sufficient for individuals with dependents.
- Basic life insurance can often be supplemented with voluntary insurance, which employees can purchase at the group rate.