I have always used rigid insulation for interior and exterior basement walls. If you ever have a water problem within the basement, insulated walls will not be your first concern. That is why it's necessary to install a sump pump system at the lowest point in your basement.
Just keep electrical outlets at code. I have no idea why anyone would want them lower than 16 inches.
Go ahead and insulate to within 2 inches from the floor. If you have water problems higher than this level....uhh..insulating to this height will no longer be the issue.