Should I install external basement insulation that does not extend above ground?
Rather than go to the trouble and expense of tying external insulation from below ground to the siding, I'd let them stop with the below ground insulation.  It at least will add a little extra R value.

Then, since your basement is unfinished, but you do use it, I'd go ahead and add additional insulation on the inside of the house* - from the ceiling on down, at least to several feet below the external ground level if not all the way down.  (Those extra few feet won't do much on the bottom but they will help some and they won't cost much more...)

*Making sure that any other potential water issues have been dealt with

The key thing with insulation is to get a continuous thermal break.  Even a small gap in the insulation can allow huge amounts of energy loss, and since you are running heat downstairs, while I don't know precisely how to calculate the long term savings, there will be one, and more importantly, your basement will be much more comfortable for year round use.