An analysis of employee benefit provision in the UK
Group risk insurance benefits offer a way of transferring some of the risk associated with employee benefits to a third party. Taking out group risk insurance policies also provides a benefit that can be highly valued by employees, as well as access to a wide range of extra support at relatively low expense.
This factsheet explores the various types of group risk insurance benefits, including group life assurance, group income protection and group critical illness, and also provides an overview of provision, claims stats and tax treatment, providing a basis from which to seek professional advice.
Group risk insurance benefits are a useful way to manage and mitigate the risks associated with employing people, especially when self-insurance is not an option. They can also be helpful in recruiting, retaining and engaging talent, though the success of this depends in part on the ability of the employer to communicate their existence to existing and potential employees. Finally, group-risk benefits can assist in supporting the purpose, values and culture of the organisation.
Expert advice should be taken when setting up or changing a group risk insurance scheme to ensure optimum cover is provided and all tax efficiencies are maximised.
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What are group risk insurance benefits?
Employers may promise certain benefits (for example, occupational sick pay) to staff as part of the contract of employment. Rather than bear all of this risk themselves, many organisations choose to take out group risk insurance policies to cover some or all of their liability.
Provided in isolation or as part of a wider benefits package, these employer sponsored products can give employees access to insured protection cover either at a reduced rate or free of charge as they are covered under one ‘group’ policy. This is often more readily available than individual cover since most employees do not generally need to provide medical details before cover is granted.
Group risk benefits can be highly valued by employees as they provide financial protection for employees and their families, yet they can be relatively inexpensive for employers compared with some other components of the typical benefits package. This is because the higher risk of individuals in poor health under a policy held by their employer is balanced, generally, by those in better health.
Group risk policies are commercial contracts which primarily support employers in meeting their contractual promises and legal obligations to their employees. The employer is generally the policyholder, the employer pays the premiums and claims are made by the employer in respect of their employees. Generally any claim is paid to the employer (or the trustees of the employer’s pension scheme in the case of group life assurance).
Group risk policies are generally taken out through a broker or consultant who is responsible for advising the employer on the design of the benefit structure, who will be covered by the policy, the suitability of the policy and the selection of a provider.
Typically, a combined package of employer sponsored life, income protection and critical illness cover will cost between 1% and 2% of total payroll.
A brief description of group risk products (group life assurance, group income protection and group critical illness) is set out below.
Group life assurance
Group life assurance is the most common employer sponsored protection benefit in the UK and often represents the sole life insurance provision for low to middle income individuals.
Group life assurance provides a benefit should an employee die in service. This can be a lump sum payable to nominated beneficiaries or a taxable pension payable to the employee’s spouse, civil partner and/or other financial dependants, or both. A group life assurance policy can be put in place by the trustees of a pension scheme to cover the scheme’s liabilities for death in service benefits or by an employer to cover a contractual promise outside of a pension scheme to pay a benefit on an employee’s death in service.
Most group life assurance policies operate within HM Revenue & Customs' regulatory framework for a ‘registered occupational pension scheme’ (which includes arrangements set up to provide benefits on death in service only). Generally, premiums paid by an employer can be offset against corporation tax and are not regarded as a benefit in kind. Lump sum death in service benefits can normally be paid tax free up to the Lifetime Allowance. It's possible to provide death in service benefits in excess of the Lifetime Allowance but expert advice is required.
According to SwissRe's 2018 data, around 53,300 policies cover 9.5 million people for death benefits valued at £1.227 billion. This represents about 40% of all insured UK life cover.
GRiD’s claims data survey 2018 showed that the group risk industry paid out just over 9,400 death claims in 2017, valued at over £1 billion. The average claim was about £114,000 and the main causes for claim were cancer and heart disease.
Group income protection
Group income protection, or permanent health insurance, is a policy taken out by an employer to cover a promise to provide sick pay to employees if illness or injury prevents them from working for a prolonged period. It can also replace lost income where an employee has to take a part-time or lower-paid position because of illness or injury.
The focus for a group income protection claim is whether or not the employee meets the definition of incapacity under the policy (in many cases, this is based on ability to do their own job). Group income protection providers support employees to help them return to work with reasonable adjustments made by their employer, often before they reach the point of making a claim. For more on reasonable adjustments, see our factsheet on disability and employment.
However, if the employee cannot work due to illness or injury the policy will pay a benefit of a proportion of their salary. The benefit is paid to the employer and then passed on to the employee through the PAYE system. The benefit level is designed to ensure that the employee will be able to maintain a reasonable standard of living but still has a financial incentive to return to work.
Insurers will also work with the employee and their employer to get them back to work as soon as it is appropriate. Insurers provide access to support services which may not otherwise be available to the employer and employee, for example access to physiotherapy or counselling sessions.
The employer usually gets corporation tax relief on premiums and benefits are normally paid to the employee via the employer’s standard payroll system on a monthly basis. The employee pays income tax and National Insurance contributions in the normal way. Generally, premiums are not treated as a P11D benefit for employees.
SwissRe's 2018 data shows that nearly 17,500 policies cover 2.4 million people for annual income protection benefits totalling £86 billion.
According to GRiD’s claims data survey 2018, the group risk industry paid out over £466 million in annual income protection benefits to a total of around 15,300 families during 2017. The average claim was about £25,000 pa and the main causes for claim were cancer and mental illness.
As well as the claims paid, in a significant number of cases each year people are helped return to work before a claim becomes payable, often with the support of the insurer, the employer or both. GRiD’s claims data survey 2017 found that nearly 2300 people were able to go back to work during 2016 because their insurer supported a return to work with some sort of active early intervention before that person was eligible for a monetary payment – over one quarter of all claims submitted. This clearly demonstrates the effectiveness of early intervention, the value that insurers add beyond the pure payment of claims, and the positive outcomes that can be achieved when all parties work together. Over half of those who benefitted from an active early intervention had help to overcome mental illness. This figure doesn’t include those additional cases where people who had been claiming, then returned to work.
Group critical illness
Group critical illness is a policy taken out by an employer to provide a tax-free lump sum to an employee on the diagnosis of one of a defined list of serious medical conditions or on undergoing one of a defined list of surgical procedures. The employer chooses between a level of core cover (which insures against some of the most serious critical illnesses) or core plus additional cover (which insures against a number of additional serious conditions too).
A claim will be considered once the employee has survived for a specified period and been diagnosed with or suffered one of the conditions covered by the policy. Most insurers will also offer cover for Permanent and Total Disability (for employees assessed as being permanently and totally disabled but not otherwise able to claim for one of the conditions covered by the policy).
Where cover is paid for by the employer, corporation tax relief is given on the premiums, the employer is liable for Class 1A National Insurance contributions on the premiums and premiums are treated as a P11D benefit for employees.
Group critical illness may be provided on a purely voluntary basis and/or as part of a flexible benefits arrangement. In this case, the premium the employee pays does not qualify for tax relief.
As the cover is often ‘voluntary’ or selected by the employee and, for most people no medical underwriting takes place, cover generally operates with a pre-existing condition exclusion. This means that someone with an existing medical condition will not be able to claim for this or a similar condition.
SwissRe's 2018 data found that over 3,600 policies cover nearly 600,000 people for critical illness benefits totalling more than £37 billion. And around two-thirds of employees insured for group critical illness are currently included under flexible benefit or voluntary schemes.
GRiD’s claims data survey 2018 showed that the group risk industry paid out over £84 million in critical illness benefits to a total of 1,180 people during 2017. The average claim was over £65,000 and the main causes for claim were cancer and heart attack.
The benefits of using group risk protection insurance
Group risk policies are used to manage people risk. Costs are known and can be budgeted for accordingly whereas employers self-insuring these risks may be exposed to potential peaks in claims from time to time.
Group income protection is used by employers as an integral part of their absence management or attendance programme, together with additional support services (which are often provided by group risk providers for free or at a heavily discounted price).
Everyday help and support
As well as meeting claims, group risk providers also provide everyday help to HR, line managers, businesses and employees alike. This is partly to give value on a daily basis but mostly to help mitigate worst-case scenarios.
Support can include employment law advice, legal document-writing systems, absence management, telephone support for difficult situations and mediation.
For employees, help can include access to an Employee Assistance Programme, second medical opinion, fast-track access to counselling, physiotherapy or treatment, helping people make changes towards better health behaviours, liaison and mediation, bereavement support and help with probate
Flexible approach for employees over age 65
Employers are not legally obliged to extend provision of insured protection products (such as group life assurance) beyond age 65 (currently) or the State Pension Age (as this increases to 66, 67, 68 and beyond). This exemption applies to insured benefits only and does not apply to self-insured arrangements.
Employers who do choose to continue insured group risk protection benefits to their staff beyond age 65 (currently) or the State Pension Age (as this increases) will find that group risk providers can be flexible in accommodating a range of upper ages or other solutions, such as a limited payment period under a group income protection policy. It is best to think ahead on this issue as it’s always easier to negotiate terms in advance rather that at the point when the first employee reaches age 65.
Group risk policies can dovetail with other provision
It is beneficial to consider how group risk protection benefits sit within the overall benefits package. For example:
Group life assurance can be valued by employees and has become for many an essential core benefit for attraction and retention of staff.
Group income protection can replace an ill-health early retirement promise following the closure of a defined benefit pension scheme. It can maintain an employee’s financial resilience when illness or disability prevents them from working but it is also a business continuity tool, providing the support needed to get employees back to work in a timely manner. Where this is not possible, it provides an employer with the financial advantages of having insured their liability to continue salary in the event of a long-term sickness absence.
A group critical illness payout can supplement sick pay or perhaps go towards additional costs faced by the employee (such as home modifications or private therapeutic care).
In particular, understanding what comes along with a group risk policy (for example, employee assistance programmes, vocational rehabilitation, fast-track access to counselling, etc), and when and how to use it, is vital and merits equal consideration along with price and core protection.
Useful contacts and further reading
Books and reports
CRONER REWARD. Employee benefits report. Stone: Croner Reward.
BARTON, T. (2016) How to determine which group risk benefits best suit an organisation. Employee Benefits. 27 July.
BETTELLEY, C. (2016) How can employers gauge a return on investment on group risk benefits?Employee Benefits. 18 July.
COLEMAN, A. (2016) How to best educate staff about group risk benefits. Employee Benefits. 26 July.
MOXHAM, K. (2017) Who says insurance doesn’t pay? Reward & Employee Benefits Association (REBA) website.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was written and updated by Katharine Moxham of Group Risk Development (GRiD).
Group Risk Development (GRiD)
GRiD is the industry body for the group risk protection sector, promoting the value to UK businesses of providing financial protection for their staff, enhancing their wellbeing and improving employee engagement. The membership includes insurers, reinsurers and intermediaries who have a collective wealth of experience built over years of operating in the group risk protection market. GRiD aims to promote group risk through a collective voice to Government, policymakers, stakeholders and employers. GRiD works with government departments and regulators involved in legislation and regulation affecting group risk benefits, and with other organisations involved in the benefits and financial protection arenas.
GRiD's dedicated spokesperson, Katharine Moxham, provides expert media comment on a full range of group risk issues.
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