Employees with group income protection

Group Income Protection

The policy behind comprehensive sick pay

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What is Group Income Protection Insurance?

In the UK, Group Income Protection is a type of insurance policy taken out by an employer that pays a percentage of a protected employee’s salary in the event that they are unable to work due to a long-term illness or injury. Sometimes referred to as “permanent health insurance”, “sick pay insurance”, “salary continuance” or “disability insurance”, it is used to provide employees with a comprehensive level of contractual sick pay. Depending upon the specific level of cover in place, a policy can pay up to 70% of an employee’s income along with pension contributions for anything from 2 years up until the employee’s retirement age. For example, if a 40-year-old employee was diagnosed with a medical condition or sustained an injury that prevented them from ever returning to work, it is possible that a policy could continue to pay a percentage of their income up until their 67th birthday. Since Group Income Protection policies are taken out by the company, the insurer pays any benefits to the company who then use those funds to pay the employee through payroll. The employee then pays income tax on these earnings as if they were still working.

Why Companies Should Consider Group Income Protection

Providing employees with the security of a replacement income if a prolonged illness or injury prevent them from working is a highly valued employee benefit. Group Income Protection protects employees and their families from the severe financial stress that can be imposed on receiving Statutory Sick Pay, which is currently just £109.40 as of June 2023. The financial security Group Income Protection generates can help increase loyalty and boost retention whilst also acting as a powerful tool in recruiting the best talent available. Businesses that offer this benefit beyond the standard levels of contractual sick pay are likely to be perceived by employees as forward-thinking organisations with a genuine care for their employee’s welfare. To help reinforce this and also help reduce unnecessary absenteeism, many insurers also provide a raft of additional services such as Employee Assistance Programmes and Virtual GP services aimed at assisting and promoting employee wellbeing and helping staff get back on their feet without delay.

Additional Services for Group Policy Holders

In recent years, many insurers have begun to offer additional services to Group Income Protection policyholders. These services might include free access to rehabilitations services, employee assistance programmes, and virtual GP services. The aim of these services is to further align the best interests of the insurer, employer, and employee, ensuring that any illness or injury does not last a moment longer than necessary. In addition to helping reduce absenteeism and promoting wellbeing within the workplace, these service may also contribute towards the employer’s duty of care.

Benefits of Using a Broker

Obtaining quotes for Group Income Protection can be a complex process due to the various levels of cover and variations in policies among insurers. Using a broker, such as Black Lion Insurance, simplifies the process saving a vast amount of executive time and helps to ensure employers are able to make fully informed decisions. Brokers with specialist knowledge of income protection policies will assist employers by highlighting the pros and cons of each policy and ensure the correct level of cover is achieved meet the needs of the business. A good broker should also help ensure that the employer obtains good value and where viable negotiate on the employer’s behalf. Brokers will often securing more competitive prices for employers than are obtainable by dealing with insurers directly.

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How much does Group Income Protection cost?

As a very broad indication, the cost of a Group Income Protection policy is likely to be between 0.5% and 2% of the payroll for the employees that are to be covered. However, given the many different factors that are considered by insurers when providing a quote, it is impossible to provide an approximate cost per employee. Instead, it is more helpful to understand the main contributing factors that insurers will consider when providing a quote. Some of the these factors are;

    • Total Payroll and Number of Employees: All other factors being equal, a policy covering an annual payroll of £5million is obviously going to cost more to cover than a payroll of £4million. However, if the £5million payroll contains just 50 employees and the £4million payroll has 100, it may be that the larger workforce is more expensive to insure.
    • Percentage of Salary Covered: Typically, a policy covers between 50% to 75% of an employee’s gross salary. Covering a higher percentage will, understandably, result in higher premiums, although the increase may not be linear. A policy covering 70% is unlikely to cost 40% more than the exact same policy covering 50% of salary. Increasing the cover to include any National Insurance and pension contributions will increase the cost.
    • Deferred Period: The deferred period is the length of time an employee must be off work before the policy pays out. Many businesses set the deferred period to coincide with the point at which contractual sick pay ends. Longer deferred periods usually mean lower premiums and so employers should consider how long the deferred period should be so that it remains both highly valued by the employees and cost effective for the business.
    • Duration of the Benefit Term: The benefit term is the period during which the policy will pay out after a claim has been made. A policy that pays out until retirement will clearly cost more than a policy with a fixed-term payout period of 5 years.
    • Occupations and Industry: The occupations carried out by employees and the employer’s industry will contribute towards the risk assessment an insurer will undertake prior to providing a quote. Industries and occupations that have a higher risk (such as construction) are likely to contribute towards higher premiums whereas lower risk, office-based roles may help reduce premiums.
    • Average Age: Everything else being equal, because of the increased health risks incurred with age, insuring a workforce with an average age of 50 is likely to cost more than insuring an identical workforce with an average age of 40.

“Own Occupation” and “Suited Occupation” Cover

Another factor that will determine the cost of any Group Income Protection policy is the whether the business opts to cover employees under “Own Occupation” or “Suited Occupation”. These two types of cover are used to determine the qualifying criteria when making a claim. “Own Occupation” is the more comprehensive of the two with qualifying claims being accepted when an employee can no longer perform the specific requirements of their job.

In general, claims against “Suited Occupation” cover would only be awarded if the employee is no longer capable of performing tasks suited to their skills and experience. So, for example, a business development manager who previously drove themselves to client meetings but loses the use of their legs could still work in a similar, internal role that doesn’t require travel.

It should be noted that policies can contain a mix of both cover types.

Pre-Existing Conditions & Medical Underwriting

Many insurers may waive the need for medical underwriting on any employees up to a certain salary level. For example, Legal and General will provide Group Income Protection without medical underwriting on salaries of up to £150k (correct as of May 2023). However, in order to assess any potential risk posed by pre-existing medical issues, some insurers may want to consider the medical history of all or part of your workforce.



What is the minimum number of employees required for a group policy?

Typically, insurance providers are likely to require a minimum of 5 employees in order to set up a Group Income Protection policy.

Does Group Income Protection cover the cost of hiring temporary staff?

As standard, Group Income Protection does not cover the cost of hiring temporary staff. However, some insurers may offer ‘additional benefit’ options that could assist with such costs. For businesses wanting to insure against the cost of replacing key members of their team, Key Person Insurance can be taken out separately.

How is Group Income Protection taxed by HMRC?

Typically, Group Income Protection is considered to be a tax-efficient employment benefit for both employers and employees. It is often considered a business expense by HMRC, so employers can usually claim tax relief on the premiums. Where the employer covers the entire cost of the policy, it is also not generally regarded as a P11D benefit in kind, so employees should not incur any additional tax liability. In 2022 HMRC revised previous “incorrect” guidance made in 2019 regarding Group Income Protection contributions made via salary sacrifice. This highlights the importance of obtaining tax advice from a qualified professional and revising the structure of any group plans on an annual basis.

What is the difference between Group Critical Illness and Group Income Protection?

As opposed to paying a replacement income, Group Critical Illness pays a a tax-free, lump sum. Policies will generally refer to a specified list of illnesses and conditions that an employee must be diagnosed with in order for the policy to make the payment. These illnesses typically include advanced cancer, heart attack, organ failure or stroke together with conditions such as the permanent loss of a hand, foot or limb or the permanent loss of eyesight or hearing. Whilst all policies differ, when it comes to determining if the policy pays out, it is often the case that the severity of the illness or condition must meet certain qualifying criteria. Instead of using a predetermined list of specific illnesses, Group Income Protection covers a much wider range of detrimental health and injury scenarios. The emphasis is less about a specific diagnosis and more on whether an employee’s condition or injury is debilitating enough to prevent them from being able to go to work.