BASIC LIFE INSURANCE: What Is It & How Does It Work?

As an employee, basic life insurance is just one part of a larger benefits package that also includes health insurance, vacation time, and other perks. Many also provide the option of purchasing voluntary life insurance, which serves as supplementary protection. Before you complete your purchase, you should know what the basic life insurance terms mean and how they work so that you can make an informed choice. Basic life insurance is often a good place to start because it provides basic but limited protection.

Basic Life Insurance

An employee’s basic life insurance through your job is usually free or very cheap, and it covers the same amount as your yearly salary. It’s ideal for singles or those with minimal final expenses. The private sector gives eligible workers basic life insurance, which is usually free or very cheap. Insurance coverage is usually set at a fixed amount or a certain percentage of your yearly salary.

This employer-provided choice is best for single people or those with low expected funeral costs, as it will cover these costs and any debts that need to be paid off. To meet their families’ ongoing financial obligations, primary breadwinners may need supplementary coverage, such as life insurance.

How Does Basic Life Insurance work?

Basic life insurance is what many employers offer their employees, and while it serves the same purpose as traditional life insurance, the name reflects the policy’s sparseness. One year’s base salary is the typical amount of coverage, rather than the ten years’ worth that experts recommend for individual life insurance policies.

Many employers provide this insurance for their employees, and it is also available through credit unions and other affiliated groups. Basic life insurance may be cheap or free for employees as part of their benefits package from their employer. For some employees, like federal workers, it is automatic unless they say no. Application forms or acknowledgments of coverage may be required from private sector workers, particularly if they are responsible for premium payments.

Who can get Basic Life Insurance?

Government workers and those in the private sector: Basic life insurance is a common part of the benefits packages provided by both public and private sector employers, though the specifics of the coverage and the companies that provide it can vary widely. All federal employees are automatically qualified for free FEGLI coverage, except those whose jobs are specifically exempt by law or regulation.

All U.S. Postal Service employees are qualified for free basic life insurance through the Federal Employees’ Group Life Insurance Program (FEGLI), barring any restrictions imposed by law or regulation.

Pros of Basic Life Insurance

A basic life insurance policy is a cornerstone of financial planning because it provides a safety net for your loved ones after your death. Examining the benefits and drawbacks of purchasing basic life insurance can help you decide whether or not it is appropriate for your situation.

#1. Affordability

One of the best things about basic life insurance is how cheap it is. A wide range of employees, from recent graduates to those in their retirement years, can afford this insurance because employers frequently offer it for free or at a very low cost.

#2. Simplicity

Basic life insurance policies do not typically necessitate in-depth medical exams or a mountain of paperwork. People are more likely to opt in because they will not have to worry about the complexities of other insurance policies.

#3. Immediate Protection

Most of the time, coverage starts almost right away, which is often the same day you start working. This quickness makes sure that you are not left vulnerable while you wait.

#4. A Good Place to Start

For people who are single or do not have a lot of debt, basic life insurance can cover their immediate needs, like paying for a funeral or paying off small debts.

Cons of Basic Life Insurance

#1. Coverage Limits

One of the biggest problems is that it only covers a small area. In many cases, the death benefit is set in advance and may not be sufficient to cover long-term costs like a mortgage, the cost of your children’s education, or even funeral expenses.

#2. Not Transferrable

Your job is frequently a criterion for basic life insurance. There is a good chance that if you change jobs, you will lose your current insurance and need to buy a new policy.

#3. No Investing Involved

There is not an investment or cash value part of basic life insurance like there is in whole or universal life. This makes it less useful as a tool for planning your finances.

Basic Life Insurance Costs

Employers often pay for their employees’ basic life insurance policies. When life insurance is provided as part of a group policy, the individual’s share of the premium is typically very low.

In addition, some companies let their workers buy additional life insurance at their own expense. Employees can choose to pay for additional life insurance coverage for as little as a few dollars a month.

Basic Life Insurance Terms

When you look into life insurance, you will see a lot of unfamiliar words and phrases in the policy documents, brochures, and terms and conditions. These hard words could get in the way of your journey and make you feel lost. Before completing your purchase, you should know what these terms mean so that you can make an informed choice.

#1. Policyholder

The person who buys and is responsible for an insurance policy is called the policyholder. Making payments on the premiums is what the policy requires.

#2. Life Assured

When you purchase life insurance, the policy covers the death of the named person. This person is called “life-assured.” In the event of the life assured’s passing, the insurance company will make payment to the designated beneficiary.

Please keep in mind that the life assured might or might not be the same as the policyholder. When Mr. John purchases a policy for his spouse, for instance, the spouse becomes the life assured and Mr. John becomes the policyholder.

#3. Nominee

A nominee is an individual who receives money from the insurance provider if the life assured passes away. It could be the life assured’s spouse, child, parent, or someone else.

Mr. John, for instance, selected his spouse as his nominee when he bought a term life insurance policy. The death benefit would go to John’s spouse in the unfortunate event that he passes away during the policy’s duration.

#4. Riders

Paying extra for riders lets you add extra benefits to your current policy that will make it cover more. One option is a waiver of premium riders due to a critical illness. This will keep your insurance coverage in place even if you can not pay the premiums because of something like being diagnosed with a critical illness listed in the policy.

#5. Premium

People who have life insurance pay a set amount each month to keep their coverage active. This is called the premium. The premium is based on things like the length of the policy, the amount of coverage, the features and benefits you choose, and so on.

#6. Death Benefits

If the life assured passes away while the policy is in effect, the beneficiary will receive a death benefit. This sum can be put toward their savings or debt reduction goals, regular living costs, or other financial obligations. Depending on the type of insurance you buy, the death benefit could be the sum assured, bonuses, rider benefits, or something else.

#7. Maturity Benefit

If the life assured makes it to the end of the policy’s term, the policy’s owner will receive a maturity benefit. You can set the amount you receive at maturity to be the sum assured, a percentage of the sum assured, a percentage of the premiums paid, etc. With term life insurance, there is no payout at the end of the policy’s term.

#8. Appointee

An appointee is someone the policyholder chooses to get the policy benefits for their nominee if the nominee is younger than 18 years old on the date of compensation.

#9. Free-look Period

After you buy a policy, you have a certain amount of time, called a “free-look period,” to think about it. The typical time frame is 15 days from the date of policy delivery.

Return the policy to the insurance company if you are unhappy with the coverage it provides. Your premium payments will be refunded to you. The amount of your refund could be reduced to account for fees like administration fees and stamp duty fees.

#10. Grace Period

If you fail to pay your premiums on time, your insurer will give you an extension of time (the grace period) to make up the difference. However, keep in mind that if you don’t pay the premiums by this date, your policy will expire and you won’t be able to use its benefits.

#11. Cash Value

As long as your insurance policy remains active, the premiums you pay will accumulate a cash value. This money is available for borrowing, withdrawal, or use in paying future premiums. This benefit is not available on all life insurance plans. Before you buy something, read the policy carefully.

#12. Surrender Value

The surrender value is the amount your insurance provider will pay you if you cancel your policy before it matures. If you have been paying your premiums on time for at least two years, your life insurance policy should have a surrender value you can cash in. This period may change, depending on the product.

#13. Policy Tenure

It is the period of time that the life insurance policy protects the insured. The length of time a life insurance policy remains in effect varies from company to company and policy to policy.

#14. Lapsed Policy

If the premiums on a policy are not paid, the policy will lapse. The policy terminates if the premium is overdue and no action is taken to bring it current within the grace period. It is possible, with the payment of past-due premiums, to reinstate a lapsed life insurance policy with some companies.

#15. Exclusions

The provisions of an insurance policy do not extend to these situations. Insurance companies do not have to pay out if a claim is based on one of these exclusions.

#16. Claim Process

This person files a claim so that they can get the death benefit if the life assured dies during the policy’s term. The name for this step is “claim process.”

Voluntary Life Insurance and Basic Life Insurance

Group voluntary life insurance offers more comprehensive protection than standard group policies. Employers frequently pay for basic employee life insurance, but voluntary employee life insurance is typically not. Coverage for the employee’s spouse and/or dependents, as well as any voluntary insurance, is provided at the employee’s expense. In most cases, the premiums will be deducted straight from their pay.

How Does Voluntary Life Insurance Work?

Individuals who already have access to a guaranteed-issue group life policy through their employer may choose to supplement it with voluntary life insurance. Although this is not a replacement for traditional term life insurance, it can be a cost-effective way to increase the amount of protection. Employee benefits like voluntary life insurance can boost the amount of standard coverage. The employee’s designated beneficiary receives the death benefit upon the insured’s passing.

Employees pay for optional life insurance out of their paychecks, even though basic is typically free. Usually, it is made accessible right away following hire and during yearly open enrollment. The employee has to pay for extra coverage for a spouse, voluntary child life insurance, and AD&D. However, basic life insurance is usually free or very cheap for employees because of how the group rating system works. There is no need for a medical exam, and the cost of voluntary life insurance is usually based on a group rate instead of an individual rate. This makes it cheaper than a traditional insurance policy with individual health rate considerations.

The employer pays for basic life insurance, which is different from voluntary life insurance. Its purpose is to protect the employee’s family in case they die. Up to a certain point, employers frequently offer basic life insurance to their staff members at no cost, but this coverage is still ostensibly optional. If an employee dies, their basic insurance policy will pay out twice their salary, up to a maximum of $50,000.

When an employee chooses voluntary, their employer takes the premium amount out of their paycheck to pay for it. When an employee chooses basic, their employer pays for the premiums.

Employee Basic Life Insurance

Employees who work for a company that offers basic life insurance typically pay no out-of-pocket expenses or very little. This is the most common type of life insurance. In the event of death, it covers the employee’s chosen beneficiary.

A basic insurance policy is typically provided to U.S. Postal Service employees without charge through the Federal Employee Group Life Insurance (FEGLI) program. FEGLI also provides benefits to other government employees, who typically foot about a third of the premium bill.

The main concern is affordability, though the price may change depending on the employer and the particulars of the plan. The basic insurance policy that employers offer is a practical starting point for many people’s financial planning because of its low cost. Remember that the coverage is typically not intended to provide long-term financial support for beneficiaries but only to cover necessary expenses like final expenses and small debts.

The most common type of basic insurance is term life insurance, which offers protection for a predetermined time frame, frequently between 10 and 30 years. Permanent life insurance options, such as whole or universal life, are not usually sold as “basic” life insurance because they have higher premiums and investment parts that make them harder to understand and cost more than the term policies that are usually called “basic.”

How Does Basic Insurance Work?

You will receive a lump sum equal to twice your yearly regular pay if you pass away while you are still under the Basic Insurance Plan’s protection. As of right now, employees who qualify for this coverage incur no additional costs for receiving it. Once you meet the requirements, coverage begins without you having to do anything. Only employees are eligible for this perk; family members cannot be included.

Is Basic Life Insurance Good?

One of the best things about a basic insurance policy is how cheap it is. A wide range of employees, from recent graduates to those in their retirement years, can afford this insurance because employers frequently offer it for free or at a very low cost.

What Type of Life Insurance is Basic Life?

Term life insurance, of which basic insurance is a type, protects a set amount of time, typically between 10 and 30 years. If the insured person dies during the policy’s term, the policy’s beneficiaries will receive a death benefit in the form of a lump-sum payment. The majority of the time, employers provide this limited coverage.

What Is the Duration of Basic Life Insurance?

Ordinarily, a basic insurance policy covers you for the duration of your employment. Some policies, on the other hand, only last for a certain amount of time, like 10 or 20 years. Because of this, you should look at your policy’s terms to find out how long it lasts.

Can You Cash Out on Basic Life Insurance?

Basic insurance plans, which are typically term life insurance, do not include cash value features. This implies that you are unable to cash out or borrow money against the policy. They do not have investment or savings options; instead, they are made to pay a death benefit to beneficiaries.

Can You Take Money Out of Your Basic Life Insurance?

Permanent life insurance allows borrowing, but term doesn’t. Existing cash-value accounts secure life insurance loans. Terms, however, do not build cash value that policyholders can borrow against.

Do I Need More Than Basic Life Insurance?

In the event of your death, your dependents will need financial support; therefore, you may want to consider purchasing additional insurance. Buying life insurance might not make sense if no one relies on your income or you have plenty of savings.

How Long Does Basic Life Insurance Last?

Basic term life insurance policies cover policyholders for the length of their employment. On the other hand, some insurance policies only remain in effect for a predetermined period. Most commonly, a basic life insurance policy will provide coverage for a time frame of 10–30 years, making it a type of term insurance. Death benefits are lump-sum payments made to beneficiaries if the insured person dies during the term. Typically, the company offers this as a limited benefit. Employer-provided benefits typically expire after an employee leaves the company.

What Is the Cheapest Age to Buy Life Insurance?

In most cases, you can get a better rate on your life insurance premium if you buy it when you are younger and healthier. Mortality and insurance costs rise with age because of the inevitable onset of age-related illnesses. Life insurance premiums are typically cheaper if you apply when you are 25 than when you are 40. Even if you do not think you will need it, buying it when you are younger will save you money on premiums.

Conclusion

You should think about your financial needs and obligations when deciding if basic life insurance through your employer is right for you. Basic insurance may be enough for immediate needs like funeral costs if you are single or do not have many financial obligations. Basic coverage may not be enough for long-term financial obligations, though, if you are the main breadwinner or have dependents. When this occurs, you can add on to your standard policy to better suit your needs.

Employees can often get basic life insurance through their employers for little to no out-of-pocket expense. Although these policies can be useful for filling in gaps in coverage or increasing an individual’s total insurance, they are rarely adequate on their own. Therefore, workers are strongly advised to take advantage of the offered free insurance and secure a policy adequate for their families’ requirements.