Life insurance is important to consider for those with families that they may leave behind after passing. Not only does it help provide the funds to pay for your final expenses, but it can help mitigate many other expenses as well. You may leave behind debt, and your loved ones will also be without the financial support you provided with your income. There are many different types of life insurance, however, and one of the most common types is basic life insurance.
Basic life insurance is just a simple life insurance policy, sometimes obtained as part of an employee benefits package, paying a yearly salary multiple to the beneficiary. It is one of the most inexpensive types of insurance, sometimes provided at no cost to the employee.
There's a lot to consider when it comes to basic life insurance, and there are several other types of insurance that you may also want to make part of your plan. Which types are best for you and your family, however, can be difficult to determine, and the options can become confusing. We're going to take a close look at what basic life insurance is, how it works, and how it compares to a few other common types of insurance.
What Is Basic Life Insurance
Employers provide plenty of benefits for their employees, and one of the most popular is life insurance. These employer-provided life insurance plans are referred to as basic life insurance, and they generally require little to no payment on the part of the employee. They are designed to provide a level of coverage equal to a small multiple of the employee's yearly salary, such as $200,000, or twice the annual base salary of the individual. This benefit is paid out in the event of the death of the covered individual, with stipulations and conditions that apply whether the death occurs at work or away from work.
The most common type of basic life insurance is called term life insurance, and it covers the employee for a specific length of time. For plans and programs that are employer-sponsored, this term is usually limited to the length of time that the individual works for the company. Provided the individual has coverage at the time of their death, the beneficiaries of the policy are paid a specified death benefit.
There is another type of basic life insurance called whole life insurance. Whole life insurance covers the individual for their entire life. This is relatively uncommon since most people do not work for the same employer for their whole career, not to mention their entire life. It is, however, sometimes offered as a component of a pension plan that is offered to former employees. Though, since pension plans are becoming much less common, so are employers that offer such plans and the whole-life policies that go along with them.
What Is The Difference Between Basic Life And Voluntary Life Insurance
Basic life insurance is a policy that is provided without the need for the covered party to choose coverage. In many cases, an employee will automatically have a basic life insurance policy activated as part of their general employee benefits package, along with benefits like paid time off and a 401(k) plan. In most cases, basic life insurance is a policy that covers the employee without any payment needed from the employee, and all costs are covered by the employer.
Voluntary life insurance is an incredibly far-reaching category that covers any type of insurance benefit that an individual, employee or not, chooses to participate in. This could be some measure of supplemental coverage enacted as a rider on a basic life insurance policy, it could be additional coverage on an existing policy, or it could be an entirely separate insurance policy taken out on the individual. Voluntary life insurance is simply any coverage that an individual elects to have.
What Is The Difference Between Basic And Supplemental Life Insurance
While both basic life insurance and supplemental life insurance are often available, they are relatively different in practice and often very different in terms of the cost to the employee. Basic life insurance will generally cover anyone that works for the company for as long as they work for the company. While your employer will typically cover the premium or most of the premium, they generally have lower coverage amounts that are limited to two or three times the employee's annual salary.
Supplemental life insurance policies will have much higher coverage limits than basic life insurance policies, but they will also have more stipulations or restrictions associated with them, as well as higher premiums that the employee would be responsible for. In many cases, employees may only qualify for supplemental life insurance if they work a specific minimum number of hours each week or each month. The employee is also usually required to maintain a valid basic life insurance policy to be eligible for supplemental coverage.
Supplemental life insurance comes in a few different types, and depending on the provider, you may have some degree of portability with the policy. This means that even if you change employers, you may be able to bring your policy with you to retain supplemental coverage at your new place of employment. The four types of supplemental coverage that you may be able to obtain include:
- Supplemental employee life insurance, which supplements the employee's own basic life insurance policy.
- Supplemental spouse life insurance, which covers the life of the employee's spouse, or in areas that allow it, coverage for other domestic partners.
- Supplemental child life insurance is sometimes available to cover eligible children and dependents.
- Supplemental insurance covering accidental death and dismemberment is another potential add-on to your basic policy and covers the employee if they are seriously injured or killed in an accident.
One of the popular restrictions on obtaining supplemental insurance coverage is that the primary employee supplements their basic life insurance with voluntary supplemental coverage before they can be eligible for spousal or dependent coverage. This means that if the employee only has basic life insurance, they may not be able to add on spouse or child life coverage if they have not already added supplemental life insurance for themselves.
Benefits Of Basic Life Insurance
There are some considerable advantages to basic life insurance, not the least of which is that it often covers employees that may not have otherwise been able to afford it. It is also able to provide additional coverage to employees that have private life insurance policies that may not provide the coverage they want or need. Additional benefits to basic life insurance include:
- Minimal or zero cost to the employee in the case of most employer-provided policies since the employer will often pay any needed premiums.
- Basic life insurance policies can help protect those that cannot afford, or are not eligible for, private life insurance. This is a huge benefit for those that can't get private insurance due to pre-existing health issues or other conditions of ineligibility. In most cases, you are automatically covered once your employer-provided benefits begin.
- Basic life insurance can provide a considerable tax benefit, and those who are eligible for basic life insurance can avoid taxes on any payment that is below $50,000. Only federal tax is owed on any payment over $50,000.
Drawbacks Of Basic Life Insurance
Just as there are some considerable benefits to basic life insurance, there are some drawbacks that should also be considered when being given employer-sponsored basic life insurance policies. The drawbacks of this type of insurance include:
- Leaving the company will generally mean losing your coverage. While you cannot lose whole life insurance provided by a pension plan, pensions are rapidly evaporating and becoming harder to find in the public sector; most employers only offer a term life policy as part of their benefits.
- Basic life insurance policies are generally difficult to customize and tailor to an individual, meaning rarely will one size fit all. Just as each company needs their met, so does each individual, and while your employer may offer a relatively robust basic life insurance policy, it may not be what you want or need.
- The expense of a basic life insurance policy has been growing steadily in recent years, and this has caused many employers to start covering only a portion of the cost of the basic life insurance policies offered to their employees, passing on a portion of the expense to them as well.
The Bottom Line On Basic Life Insurance
Employer-sponsored basic life insurance policies are frequently touted as a one-size-fits-all solution, and while that is rarely true, they can still offer considerable benefits to employees. Not only can they offer additional benefits to the employee, but they can also do so without the health or wellness requirements of other life insurance plans and policies that are obtained privately. This can be a crucial point to remember if you've been denied insurance through private firms. Make sure you understand how much coverage you'll need in total so that you can also obtain voluntary or supplemental insurance coverage if needed.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.