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 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.1 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 annually 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.1
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.1 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.
Term vs. Whole Life Insurance: What’s the Difference?
For many life insurance shoppers, the first consideration when buying a policy is deciding between term life insurance and whole life insurance, also called permanent life insurance. Term life insurance offers you a death benefit for a specified term and provides no benefit if you outlive that term. Whole life insurance is a type of permanent life insurance, which is designed to provide a death benefit for your entire life, even if you live to a ripe old age.
Here’s what you need to know about each of these life insurance options so you can make the best decision for your needs.
What’s the Difference Between Term and Whole Life Insurance?
Term Life Insurance Whole Life Insurance
When you purchase a life insurance policy, you’re signing a contract with the life insurance company. Per your contract, you will pay premiums to the insurer for a specified time period, or term. In return, the insurer promises to pay a death benefit (also known as the face amount) to your beneficiaries if the insured person passes away while the policy is in place. Term life insurance lasts for a specified amount of time—generally between one and 30 years. If the insured person doesn’t pass away during the term, the policy will expire with no death benefit paid.
Whole life insurance is a type of permanent life insurance, a category that also includes universal life, variable universal life, and indexed universal life. Like term life insurance, whole life promises to pay your beneficiaries a death benefit in exchange for your premiums (as long as you die while the policy is in force). The major difference is that whole life insurance covers you for your entire life, not just for a specific term.
Term life insurance generally provides a higher death benefit for a smaller premium because it does not need to last your entire life. If you die while your children are young, for example, term coverage can provide enough death benefit to cover your lost income until your kids have reached adulthood—at a much lower cost than whole life insurance. The benefit may even be enough to cover their education expenses, depending on how much you can afford.
However, if the insured person survives the term, you won’t see any financial payout from term life insurance. Additionally, if you wish to buy another insurance policy after the term has ended, you may not be able to qualify.
Premiums are based on the insured person’s age and health. If your term life insurance policy expires, there’s no guarantee that you will be able to extend, renew, or purchase a new term policy.
Whole life insurance solves some of these problems. Because this type of insurance lasts a lifetime and its premiums are generally level from the beginning of your policy, a whole life policy protects you for a consistent cost, no matter your future health. However, whole life insurance is generally more expensive, which could be prohibitive for some people.
Term life insurance policies accounted for40.9% of the total number of policies sold in 2019 but represented 72.2% of the total face amount issued that year, according to the American Council of Life Insurers.2 This difference in the number of policies vs. total face amount stems in part from the fact that term life insurance tends to be less expensive than whole life, since your risk of dying while covered is much lower. That means you can buy a term policy with a larger death benefit for a smaller premium than a whole life insurance policy.
Whole life insurance policies tend to be much more expensive than their term counterparts. That’s because you are guaranteed to die, no matter how long you live, so the insurance company is much more likely to have to pay out a death benefit. In contrast, there is a reasonable chance that you will outlive the term of a term life insurance policy.
To make sure whole life insurance remains affordable to policyholders as they age, insurers generally charge a level premium, which stays consistent over the life of the policy. The amount that would be required to pay a claim in the first few years of the policy is lower than the amount charged in premiums; the excess goes into a cash account that helps offset the cost of insurance as it rises with age.
With term life insurance, you are contracted to pay premiums through the duration of the term, which are returned as a benefit upon death. This benefit is not guaranteed as it will expire after the term is over, and there’s a decent chance it will never be paid. In that way, term life insurance is similar to homeowners or auto insurance: You pay premiums to protect yourself against loss, and if you don’t need to make a claim, the money you spent in premiums is simply gone.
This is where an attractive feature of whole life insurance comes into play: cash value. Insurers are legally required to offer those premium overpayments to policyholders as a cash value that can be accessed. This means whole life insurance can potentially serve double-duty for some policyholders: protecting their family in case of early death, as well as providing a source of income.
Accessing the cash value of a whole life insurance policy can potentially cause the policy to lapse if sufficient premiums aren’t paid to keep it active.
Which Is Right for You?
Deciding between these two types of insurance depends in part on your specific financial needs. There are several important factors to keep in mind when choosing between term and whole life insurance, or when deciding whether to purchase a life insurance policy in general.
Your Age and Health
The younger and healthier you are when you purchase life insurance, the less expensive you can expect your premiums to be, whether you choose term or whole life insurance.
Your Family’s Financial Needs
If you expect your family to be financially secure in a certain number of years, even without your contributions, term life insurance may make the most sense for you. For example, if you have young children, you may want to provide coverage until they reach a certain age or finish college. However, if you have family members with disabilities or other long-term special needs, whole life insurance may help you ensure that they will be financially taken care of no matter how long you live.
Cost is a factor in purchasing life insurance, but it’s not the only consideration, as noted above. Insurance shoppers who would like to ensure a lifelong death benefit and a potential future income source may consider the whole life insurance premiums to be money well spent, even though they will likely cost more than a term life insurance policy.
Choosing between term and whole life insurance will differ from person to person, since your specific calculations depend on your family, finances, and future plans. But understanding the benefits and drawbacks of both term and whole life insurance can help you make the right choice for your specific situation.