As part of a benefits package, many firms provide basic life insurance to their employees. Basic life insurance is a type of group life insurance that is supplied to employees at free or little cost. Individuals who are insured can expect their beneficiaries to receive a restricted and predetermined death benefit if the policyholder dies during the coverage term.
Understanding what basic employer-sponsored life insurance is and how it work can help you assess whether this type of employee life insurance coverage is necessary for your financial strategy.
What Is Basic Life Insurance?
Basic life insurance is a type of group life insurance in which an insurer enters into an agreement with a person or institution, such as an employer, to offer low-cost coverage to the entire group.
One of the most popular perks that organizations provide to their employees is life insurance. While there are various solutions on the market, the most common ones require employees to pay very little or nothing at all. A plan is also usually a predetermined financial amount or a multiple of a person’s base income. For example, an employer may provide each employee with $100,000 life insurance coverage. They may decide to double the person’s base yearly income.
How Does Basic Life Insurance Work?
When businesses provide basic life insurance as an employee benefit, the insurance policy is held by the organization, and each employee receives a certificate of insurance. Basic life insurance is typically offered as annually renewable term life insurance. This means it can be renewed by your employer each year. Basic life insurance is normally in effect for the duration of your work.
Depending on the insurer, you may be able to keep the policy (called porting insurance) or convert it to another type of life insurance when your work is ended, as long as you continue to pay the premiums.
However, this is typically a considerably more expensive choice than locating an individual coverage on your own.
Is Basic Life Insurance Necessary?
Basic life insurance is simple to obtain and typically costs little or nothing. Most employees who are offered basic life insurance will take advantage of the option since this low-cost (or no-cost) incentive can assist provide additional peace of mind.
However, having basic life insurance does not mean that your life insurance needs are completely met. For example, your employer could cancel the policy without notice, leaving you without coverage if this is your only policy.
Furthermore, the level of coverage provided by most basic life insurance policies is unlikely to be sufficient for your life insurance needs—for example, one or two times your yearly wage. It is, in a word, basic. So it may not provide a sufficient death benefit to cover your family’s financial obligations, such as paying off a mortgage or paying for your children’s college tuition.
It is preferable to have basic life insurance than no life insurance. However, the ideal plan is to evaluate how much life insurance you require. This exercise will assist you in ensuring that you have adequate coverage to care for your dependents if something were to happen to you.
Types of Basic Life Insurance
Life insurance is classified into two sorts. Term life insurance is the most common type of policy for employer-sponsored life insurance plans. Term life insurance protects a person for a set term of time. In employer-sponsored programs, the term refers to the time spent working for a corporation. Employer-sponsored term insurance pays a specific sum, or death benefit, to the employee’s beneficiaries if he or she dies while covered by the term life insurance.
Whole life insurance is the other sort of life insurance. Whole life insurance provides life insurance coverage for the insured’s whole life. Most firms will not provide whole life insurance to their employees because most people do not work for the same employer their entire careers. Some pension systems may provide life insurance to former employees, but as pensions become extinct, so do firms who provide entire life insurance to their employees.
How Much Does Basic Life Insurance Cover?
Employees can choose coverage amounts in $10,000 increments up to eight times their basic annual wages, with a maximum of $750,000 or eight times their basic annual earnings, whichever is smaller. The monthly premium is calculated depending on the employee’s age and is changed on January 1 of each contract year.
Cost of Basic Life Insurance
The cost of basic life insurance is usually covered by the employer. If an employee must pay for their life insurance, the fees are usually low. This is because the insurance is part of a group insurance policy.
Furthermore, some firms allow their employees to pay for supplemental life insurance coverage. Employees can typically pay for incremental life insurance enhancements for as little as a few dollars per month.
Advantages of Basic Life Insurance
- Employer-provided life insurance provides employees who would not otherwise have access to life insurance: It also covers employees who have private life insurance policies but may require additional coverage. The following are some of the benefits of basic life insurance:
- There is little to no cost: Employees pay little to no money for employer-sponsored basic life insurance.
- People who are not qualified for private life insurance are protected: If your health prevents you from obtaining private life insurance, you may be able to obtain life insurance through your employer’s group life insurance policy.
- Tax advantages: Employees insured by an employee-sponsored policy are only required to pay federal taxes on life insurance coverage payments in excess of $50,000 in benefits.
Indeed, getting basic life insurance can be beneficial in various ways. But if you want to get the most out of the advantages, there are some things to consider.
For instance, if you buy term or whole life insurance, you’ll be more likely to pay lower premiums if you start as early as possible. Make sure to review the policy every three years or earlier to check if the coverage is sufficient to cover a major life event. Regarding premium payment, consider paying it annually to avail yourself of some discounts the insurance company offers.
Disadvantages of Basic Life Insurance
Although employer-sponsored basic life insurance can be beneficial for many people, there are some drawbacks. Some downsides are as follows:
- You lose coverage if you leave the employer: Term life insurance is the most common type of basic life insurance coverage provided by employers. As a result, if you leave your employer, you will have no life insurance coverage for retirement or a new career.
- A single size does not fit all: When it comes to life insurance, each employee will have distinct requirements. As a result, while employer-sponsored life insurance is convenient, it may not meet everyone’s needs.
- It can be costly: The cost of group insurance has risen over time. As a result, some businesses may pass on some of the costs to their employees.
Consider these disadvantages and determine if basic life insurance suits your unique situation.
Is Basic Life Insurance Enough?
When it comes to life insurance, everyone’s requirements vary. These various needs can be observed in the cash amount required and the precise type of coverage required. Most people require significantly more than the $50,000 to $100,000 offered by many companies. It is advised that you calculate your need for life insurance. Calculating your coverage requirements will help you guarantee you have enough.
Consider how long you want to support your dependents before calculating your requirement for life insurance. You should also consider any initial fees they may incur in the absence of your income. Personal life insurance is more expensive than basic life insurance, but it is frequently more comprehensive.
When it comes to life insurance, each person has different requirements. There is no one type that is best for everyone. Make certain you understand the many types of coverage available.
If you are purchasing life insurance for the first time, it’s best to work with an insurance broker. They act as intermediaries between insurance buyers and insurance companies. Importantly, they can answer all your questions and provide valuable advice on which insurance suits your needs. You can rely on them to find the right insurance coverage.
For example, a Colorado insurance broker can help you search for life insurance policies if you’re from Colorado or other nearby states. They can gather quotes and check on various insurance providers to find the best insurance coverage.
Is Accidental Death Covered By Basic Life Insurance?
Life insurance policies, in general, cover deaths caused by natural causes and accidents. When you die, your insurer may refuse to pay out to your beneficiaries if you lie on your application. Life insurance policies cover suicide, but only if a specific length of time has passed after the policy was purchased.
Is there a cash value in basic life insurance?
When you pay your premiums for most whole life insurance plans, some of the money goes into an investment account. This account contains the cash value of the life insurance policy. If you cancel a policy, you might receive the cash value instead of the face value as payment.
Can you borrow against your basic life insurance?
No. Borrowing from your life insurance policy might be a fast and simple way to receive cash when you need it. Borrowing against permanent or whole life insurance coverage is the sole option. Policy loans are borrowed against the death benefit, and the insurance company uses the policy as collateral for the loan.
When I quit my work, what happens to my life insurance?
If you have no alternative options, your life insurance coverage will often stop when you leave your employment. That means you’ll need to apply for new coverage depending on your current age and health status (either through your new employment or separately from a life company or broker).
Voluntary Life Insurance vs. Basic Life Insurance
Many firms enable employees to buy voluntary life insurance, often known as supplemental life insurance, to augment their basic life insurance policy. Voluntary life insurance allows you to purchase additional life insurance coverage at a lower cost than you would normally pay if you purchased insurance outside of your group plan. That implies employees might add optional life insurance to their basic life insurance to boost their coverage for less than they would pay if they purchased a separate policy.
The voluntary form, like basic life insurance, is often guaranteed up to a specified maximum. This makes employer-sponsored life insurance available to people who might not otherwise qualify for a policy.
Voluntary life insurance may also allow you to obtain spouse or dependent life insurance policies at a group rate. However, the payout amount is typically quite limited.
Voluntary coverage, like basic coverage, may not be portable if you leave or lose your job and may be canceled if your employer controls the insurance. If possible, have another life insurance policy with adequate coverage in place in addition to your employer’s plan.
Who Are Beneficiaries under a Basic Life Insurance Policy?
The individual or organization that you formally name as the recipient of the advantages of your financial products is known as a beneficiary. That is the amount that your policy will pay as a death benefit if you have life insurance coverage.
How Are Payments Made under Basic Life Insurance?
The beneficiary selected on the policy will receive the life insurance payout. If there are multiple beneficiaries, each must submit a separate claim. The insurance provider will then distribute the money the policyholder left to each individual or group.
Who Is Covered by Life Insurance after Death?
Although you can legally choose anyone or any organization as a beneficiary, in most situations the recipients of a death benefit from life insurance are your partner, children, or other close relatives. You must state how much of the death benefit you want each beneficiary to receive when naming more than one.
Can I Cancel My Basic Life Insurance Policy?
You are only permitted to take tax-free withdrawals from the policy up to the number of premiums you have previously paid. Usually, you must pay taxes on any sum that exceeds the premiums you have already paid.
Conclusion
Employees are generally offered basic life insurance or employer-sponsored life insurance policies at a low or no cost. While these plans are frequently useful for supplementing a person’s overall life insurance coverage or giving coverage to persons who would not otherwise be eligible for life insurance, they are rarely enough. As a result, employees are encouraged to take advantage of the free life insurance coverage. They should acquire a policy that suits the needs of their families.
Basic Life Insurance FAQs
Is life insurance worth it if you're single?
You don’t have to have a family to benefit from life insurance, especially if you purchase permanent coverage. Life insurance for single people can be a terrific way to save money and put yourself up for success later in life, while also providing you with a death benefit to leave to those you care about.
Is life insurance through work worth it?
If you can obtain a comparable rate elsewhere, purchasing extra coverage via your employer may not be worth it. Even if individual insurance is slightly more expensive, it is still likely to be a better bet due to its portability.
Do you lose life insurance when you retire?
When you retire, you may lose your employer-provided life insurance coverage, so you should consider obtaining your own. If you have debt, such as a mortgage, or a spouse who is financially dependent on you, having your own life insurance policy in place is a good idea.
