How does group insurance work?
Chris Broome – Chartered Financial Planner
Whether you’re an employer that is considering offering group insurance to employees or a worker that benefits from group cover, it’s important to understand what it is, how it provides security and when it can be used.
Group Life Insurance is a popular benefit that’s usually offered by employers. It acts in a similar way to a Life Insurance policy, which an individual takes out. In the case of Life Insurance, the individual will pay regular premiums and should they die during the term of the policy, their loved ones will receive a lump sum. It’s a step that can provide peace of mind that your family will be taken care of financially should the worst happen.
As the name suggests, group insurance covers a group of people rather than just one and the ongoing premiums are usually paid in full by the employer. It’s a benefit that’s sometimes referred to as ‘death-in-service’ as rather than a fixed-term, employees will typically be covered while they remain employed with the company.
What would group insurance cover?
First, it’s important to note that group insurance policies can vary.
If you’re currently covered by a group insurance policy, you should review your employee handbook or talk to your employer to fully understand what’s covered. If you’re thinking about putting group cover in place at your business, there are different options to consider and weigh up how they’d suit your employees.
Typically, a group insurance policy will pay out if you die while employed, to either your family or a nominated beneficiary. The benefit amount is often linked to the employee’s income, such as two or four times their annual salary. So, an employee earning £40,000 with group insurance equivalent to four-times their annual salary would leave their loved ones a £160,000 lump sum if they were to pass away whilst employed with the firm.
This lump sum is usually paid free of Income and Capital Gains Tax. They also may be written into a trust, which will ensure the sum is considered outside of your estate for Inheritance Tax purposes. However, this isn’t always the case.
In some cases, group insurance provided by an employer may be extended to cover your spouse or civil partner and provide other benefits, such as bereavement counselling to loved ones. Again, this isn’t guaranteed for all group insurance policies so you should check your policy first.
The lump sum loved ones receive can help provide financial security while they grieve. It could, for example, be used to pay off an existing mortgage debt or ensure children’s school fees will continue to be paid even as household income is reduced or stops.
There are benefits to group insurance whether you’re an employer or employee.
Benefits of group insurance for employees
The key benefit of group insurance is knowing that your loved ones will be financially secure should something happen to you, without having to set up your own policy. However, it’s worth assessing if the policy offered by your employer would be enough and if other individual policies should support it.
Depending on your loved ones and plans, you may find that further Life Insurance is needed to cover the expenses they would face, such as the mortgage. However, with group insurance covering part of the necessary sum, the policy you take out can be for a smaller amount, lowering premiums. It’s also an opportunity to think about if you and loved ones would benefit from potential extras some policies offer.
While considering Life Insurance, you should also take the time to assess other forms of financial protection. This includes Income Protection, which would pay out regular amounts if you’re unable to work due to illness or injury, and Critical Illness Cover, which would pay a lump sum on the diagnosis of a specified critical illness.
You may not need all types of financial protection, for example, if an employer has a strong sick pay package, Income Protection may not suit you. However, understanding how these policies have the potential to provide security can help you choose the most appropriate ones.
The benefit of group cover for employers
As an employer, group insurance can form part of your benefits package to attract and retain key members of staff. During the recruitment process, it’s a benefit that can make your firm more attractive than competitors as a place to work. It’s a benefit that can help drive your business forward.
Group cover can supplement other benefits you may offer employees, such as a competitive pension scheme or sick pay policy. Taking steps to ensure that your employees’ loved ones would be taken care of should they die in service can help ensure employees know they’re valued and the company does the ‘right thing’.
Although the scenario of an employee dying is rare, it can happen. By taking out group insurance now, you know that should something happen, the processes and support are already in place.
In addition, the premiums paid for the group insurance usually qualify as an allowable business expense for Corporation Tax purposes.
Next Steps
Longhurst provides a corporate service called Enterprise™, which amongst many advice areas, includes group and corporate insurances.
For more information please get in touch today.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
