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Introduction
Group Income Protection policies are taken out by employers to provide employees with a replacement income when they are unable to work due to long term illness or injury. Employers can set the levels of cover to suit their needs and budget, and in most cases, the premiums are:
An allowable business expense, so qualifying for Corporation Tax relief. Not treated as a P11D benefit, so not incurring any income tax liability for
employees.
Exempt from Insurance Premium Tax.
The valuable insurance for employees is supplemented by important support services to help them recover and return to work. Through this combination GIP can help employers as well as individual employees.
Group Income Protection
A quick guide for UK private sector employers
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Policy Design
Employers choose the amount and basis of cover.
The amount of cover is usually defined as a percentage of earnings. The maximum level of cover available in the market varies by provider but is typically around 75%, including any benefit claimable from the state under the Employment and Support Allowance. This approach ensures there is a return to work motivation in place, in other words it is not more lucrative to receive benefit than in work.
Many employers choose to insure a benefit level of 50% of salary due to affordability and simplicity. Providers do also limit the maximum earnings by imposing a ceiling in cash terms, but as these are often £300,000 and above, they are rarely a barrier in practice to getting suitable cover for all employees and Directors.
There are many options for the basis of cover to help tailor the policy and support services, with the term of cover and type of occupation being insured both being key to pricing.
The term for cover is determined from the outset, with a starting point defined as a deferral period, such as 26 weeks (from the date of absence due to illness/injury) and an end point such as retirement. The longer the deferral period before the claim is payable, the lower the premiums will be. Claims are usually payable to retirement or for a fixed term, such as five years. The shorter the cover period, the lower the premium will be and vice versa.
Insuring against the possibility of someone not being able to carry out their OWN occupation is more expensive than insuring against that same person not being able to carry out any SUITED occupation. This is in turn is more expensive than insuring the same person against the risk of being unable to perform ANY occupation. Employers choose the basis and so control what cost will be payable.
What does it cost?
Full cover to retirement age typically costs between 1% and 1.5% of gross payroll. Limited-term cover can cost as little as one third of this. Employers pay premiums based on the number of employees and a range of other factors, such as the occupations of those being insured.
Maximum Cover = 75% of Earnings – State Benefit
Subject to a monetary cap, typically around £300,000
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What are the legal implications?
Employers must ensure the commitments they make in their contracts of employment are in line with the benefit delivered. Creative Benefits provide consultancy on all aspects of scheme design to help employers comply.
Group Income Protection policies can help employers treat employees equally, removing ad hoc decision making during period of absence which can leave an employer open to questions over their actions and even legal action.
What are the tax issues?
For employees:
Group income protection cover (i.e. the premiums paid for cover/the benefit itself) does not constitute a P11D liability for employees.
Claim benefits which are paid monthly via the employer’s standard payroll system are subject to income tax and national insurance contributions.
For employers:
GIP schemes are not subject to Insurance Premium Tax.
When offered to the majority of employees the premiums are normally an allowable business expense, so qualifying for full corporation tax relief.
Free Cover
By applying for insurance as a group, preferential terms apply including the availability of cover without the need for underwriting, i.e. underwriting free cover also known as simply Free Cover.
Free cover limits are set for each scheme (although some providers do operate some blanket terms as well) and usually cover all applicants.
What happens when someone claims?
In simple terms, the agreed income level is paid out for the agreed term or until such time as the employee returns to work.
In practical terms, there can be much more to it. Policy options may for example provide for stepped income claims, allowing the employee to make a partial return to work. Importantly, a range of services can be included to help rehabilitate employees.
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Return to Work Support
GIP providers will work with employers to help their employees recover and return to work as quickly as possible, often intervening prior to the absence becoming a claim.
GIP schemes can also provide a range of services to help reduce absenteeism and boost employee wellness. At the end of the day, Providers have a vested interest. For example, insurers are naturally keen to intervene early to help rehabilitate staff back to work during the deferred period.
Many providers also offer free employee assistance programmes (EAPs) and other wellness-related tools as add-ons to GIP schemes. These can help the directly affected employee and their
families and colleagues adjust to stressful or difficult situations, which
are often experienced during long-term absence.
Employers are increasingly appreciating these as they start to feel the implications of the government's welfare reform programme.Conclusion
GIP is valuable to employers and employees. It can help businesses run smoothly and efficiently, and, in providing one of the foundations for employees’ financial well being, GIP serves two important needs.
Modern policies can be tailored to suit needs and budget. The typical cost for GIP policies is 1% to 1.5% of payroll.
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Creative Benefits
Creative Employee Benefits is a specialist Employee Benefits Consultancy. We serve the needs of UK private sector companies and not-for-profit organisations. Our services include full design, market research and implementation across a range of Risk Benefits, including Group Income Protection.
Our business is also a recognised leader within the industry. An easy demonstration of this is our dual awards at the 2011 and 2012 FT Financial Adviser Awards:
Disclaimer
Whilst we make every effort to ensure all our communications are accurate and up-to-date, we do not accept any liability for the information given in this bulletin. No advice is intended and you should seek professional advice before acting upon the information.
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Manchester: 53 Fountain Street, Manchester, M2 2AN. Tel: 0161 235 6339. Fax: 0161 235 6340. Online: www.creativeeb.co.uk. Email: info@creativeeb.co.uk
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