What Is Basic Life Insurance?

Life insurance may not be the first benefit you think about when starting a new job, but employer-provided coverage can become an important part of your financial safety net. Basic life insurance is often included automatically and may cost little or nothing, yet the amount of protection it provides can vary widely. Knowing how this coverage works, what it costs and when you may need additional insurance can help you decide whether your current policy is enough.

To evaluate how basic life insurance fits into your overall financial plan and whether you should think about other types of life insurance policies, consider working with a financial advisor.

Basic Life Insurance Definition

Basic life insurance is typically an employer-sponsored life insurance policy that provides a death benefit to your designated beneficiaries if you die while the coverage is active. Employers often provide this coverage automatically as part of an employee benefits package, sometimes at little or no cost to the worker.

The amount of basic life insurance may be set as a flat dollar amount or as a multiple of your annual salary. For example, an employer might provide coverage equal to one year of pay, although benefit levels vary by company and plan. You generally choose one or more beneficiaries who would receive the death benefit. Beneficiaries can include a spouse, children, other relatives or, in some cases, a trust or organization.

Basic life insurance is usually designed to provide financial support for expenses such as funeral costs, household bills or other obligations after your death. Unlike some permanent life insurance policies, it generally does not build cash value that you can borrow against or withdraw.

Because basic life insurance is often provided through an employer, the coverage may end or change if you leave your job. Some plans may allow you to convert or continue coverage on your own, but the cost and terms can differ from the employer-sponsored policy.

Basic Life Insurance Types

There are two main types of life insurance. The most popular type of policy for employer-sponsored life insurance programs is called term life insurance. Term life insurance covers a person for a specific term. In employer-sponsored programs, the term is limited to the time that a person works for a company. Employer-sponsored term insurance pays a particular sum, or death benefit, to the employee’s beneficiaries if he or she dies while covered by the term life insurance.

The other type of life insurance is called whole life insurance. Whole life insurance provides life insurance protection for the insured person’s entire life. Because most people do not work for a company for their entire careers, most companies will not provide whole life insurance to their employees. Some pension plans might offer life insurance to former employees, but as pensions go the way of the dinosaur, so do employers that offer whole life insurance to their employees.

Basic Life Insurance Cost

One of the main advantages of basic life insurance is that employees often pay little or nothing for it. Many employers cover the full premium as part of their benefits package, particularly when the policy provides a relatively modest death benefit. In other cases, employees may pay a small amount through payroll deductions.

Basic life insurance premiums generally depend in part on the amount of coverage provided. A policy offering a $25,000 death benefit will usually cost less than one providing coverage equal to one or two times an employee’s annual salary. Employers may negotiate group rates with an insurer, which can make workplace coverage less expensive than purchasing a comparable individual policy.

Age is another important factor in determining life insurance costs. Group life insurance plans may use age-based rate bands, meaning premiums can increase as employees get older. However, because basic coverage is often subsidized by the employer, employees may not directly feel the full effect of those higher costs.

Employer-paid group term life insurance can also have tax implications. Under federal tax rules, the cost of employer-provided coverage above certain limits may be treated as taxable income to the employee, even though the employee does not receive that amount in cash. This can slightly increase taxable wages reported on a paycheck or Form W-2.

Basic Life Insurance Advantages

Employer-provided life insurance gives employees access to life insurance who wouldn’t otherwise have it. It also provides coverage to employees who have private life insurance policies but may need extra coverage. Some of the advantages of basic life insurance include:

Low to no cost: Employer-sponsored basic life insurance comes at little to no cost to employees.
Protects people who aren’t eligible for private life insurance: If you can’t get private life insurance due to your health, you may be able to get life insurance through your employer’s group life insurance policy.
Tax benefits: Employees covered by an employee-sponsored policy only have to pay the federal taxes on any life insurance coverage payment that exceeds $50,000 in benefits.

Basic Life Insurance Disadvantages

Although employer-sponsored basic life insurance can be advantageous for many people, there are some disadvantages as well. Some disadvantages include:

If you leave the company, you lose coverage: Most employer-sponsored basic life insurance coverage is term life insurance. Therefore, when you leave your company, you will no longer have life insurance coverage for retirement or a new job.
One size doesn’t fit all: Each employee will have different needs when it comes to life insurance. Therefore, employer-sponsored life insurance might be nice to have but may not be a match for everyone’s needs.
It can be expensive: Group insurance has increased in cost over the years. Therefore, some employers might pass some of the costs on to their employees.

Is Basic Life Insurance Enough?

Everyone has different needs when it comes to a life insurance policy. Those different needs can be seen in the dollar value that’s needed and the specific type of policy that’s needed. Most people need far more than the $50,000 to $100,000 that many companies offer. It’s recommended that you take the time to calculate your need for life insurance. Figuring out your coverage need will help ensure you have enough.

To calculate your need for life insurance coverage, consider how long you’d like to support your beneficiaries. You may also want to consider any upfront costs they may have without your income. While personal life insurance will be an out-of-pocket expense, it is often more comprehensive than basic life insurance.

Each individual has unique needs when it comes to life insurance. There’s not one specific type that’s right for everyone. Be sure you understand the various types of policies that are available.

Alternatives to Basic Life Insurance

Basic employer-sponsored life insurance can be convenient and inexpensive, but it may not provide enough coverage for every household. Depending on your financial obligations, family situation and budget, you may want to consider other types of life insurance that offer more coverage, portability or long-term features.

Individual term life insurance: Term life insurance provides coverage for a set period, such as 10, 20 or 30 years. It can be a cost-effective option for people who want enough coverage to replace income, pay off a mortgage or support dependents during their working years.
Supplemental group life insurance: Many employers allow workers to purchase additional coverage beyond the basic benefit. Premiums are typically deducted from your paycheck, although rates may rise with age and coverage may not always follow you if you leave the employer.
Whole life insurance: Whole life insurance is a form of permanent coverage designed to last for life as long as required premiums are paid. It also builds cash value, but premiums are generally higher than those for term coverage.
Universal life insurance: Universal life combines permanent life insurance with a cash-value component and may offer more flexibility in premiums and death benefits. Costs and policy performance can vary, so it is important to understand the policy’s fees, assumptions and guarantees.
Spouse or dependent life insurance: Some workplace plans allow employees to purchase coverage for a spouse or dependent children. This can help with expenses that might arise after a family member’s death, though benefit amounts are often more limited than individual policies.
Accidental death and dismemberment insurance: AD&D insurance may pay benefits for deaths or serious injuries caused by qualifying accidents. Because it generally does not cover deaths from illness or many other causes, it is usually better viewed as supplemental protection rather than a replacement for traditional life insurance.
Self-funding with savings and investments: People with substantial assets may eventually decide they need less life insurance because savings, retirement accounts and investments could provide financial support for survivors. This approach generally requires careful planning to make sure enough liquid assets would be available when needed.
Combining different policies: Some people use basic employer coverage as a foundation and add an individual term or permanent policy for additional protection. Combining policies can help diversify coverage sources and reduce dependence on insurance that is tied to a specific job.

The best alternative to basic life insurance depends on how much coverage you need, how long you need it and whether you want benefits such as portability or cash value. Comparing costs, policy terms and coverage limits can help you decide whether supplemental employer coverage, an individual policy or a combination of options makes the most sense for your financial plan.

Bottom Line

Basic life insurance or employer-sponsored life insurance policies are typically offered to employees at a low or no cost. While these policies are often helpful for boosting a person’s total life insurance coverage or providing coverage to people who might not otherwise be eligible for life insurance, they are not typically enough coverage. Therefore, employees are encouraged to take advantage of free life insurance coverage and purchase a policy that meets their family’s needs.

Life Insurance Tips

Partnering with a financial advisor to determine the right amount of coverage is a smart move because they can help you make the right financial choices for your long-term goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Usually, you can calculate the right amount of life insurance by factoring in your income. Depending on the other resources you have to give your dependents after your passing, you may not need to replace 100% of your income. Also, one of the key decisions you’ll need to make is whether you should have permanent life insurance or term life insurance.