Understanding Group Life Insurance

May 2nd, 2022
Understanding Group Life Insurance

What is group life insurance?

Group life insurance is a type of insurance offered to businesses with greater than two members of staff, where a single policy covers an entire group of people, typically the employees of that company. Group life insurance is ideally offered to employees as part of a complete employee benefits package. It is also known as death in service benefit.

Businesses are not required to provide group life insurance to their employees but many choose to do so, as in a competitive marketplace, it is a very popular selling point for new starters and existing employees alike.

Just because the policy is known as “death in service” doesn’t mean that it only applies should an employee die whilst at work or due to the nature of the work. It merely means that an employee has to be employed by an employer offering this insurance in order for their loved ones to benefit from it.

How does a group life insurance policy work?

The employer or CEO of the business is usually the policyholder and maintains the master contract. All those covered under the policy typically receive a certificate of insurance which proves that they are covered and explains the full details of the policy and what their responsibilities and exclusions are. As with other types of life insurance, the employees are allowed to nominate their beneficiaries.

Most group life insurance policies are supplied on an annually renewable term, with the employer paying the premiums and the cover providing typically one to two times each individuals’ salary, although some policies will provide cover of up to four times an individual’s annual salary. As the employer pays the premium, they also agree on the level of cover required with the insurance company. The cover for each employee remains active until such time as the individual’s employment is terminated (it doesn’t matter whether the termination is implemented by the individual or the employing organisation) or the policy expires without being renewed.

An organisation should consider how much benefit to offer their employees. They may choose to vary the allowances based upon an employee’s pension scheme membership, seniority, age, or time elapsed with the company or to stick with a set multiple of annual salary per individual. They should also determine whether a salary multiplier includes bonuses and overtime or just the flat rate salary. Some employers prefer to offer a fixed level lump sum death in service benefit, for example £100,000 per employee.

Whichever option an employer chooses, they should be entirely upfront with their staff and detail the policy clearly in an employee handbook or other such HR documentation so that employees understand exactly what level of financial benefit their beneficiaries would stand to receive should they die whilst in employment.

Does the NHS have its own death in service benefit?

Many organisations offer death in service as an employee benefit [1]. The NHS has attracted attention because the government has introduced a specific COVID-19 death in service scheme in England for NHS and care staff which pays out a flat rate of £60,000 to the families of staff who die from the virus during the course of their work. This is separate to any other pension or benefit schemes and is not offered through Free Price Compare.

Why should businesses take out a group life insurance policy?

Including group life insurance in an employee benefits package is of benefit to both the business and the individuals covered. For the employees, they access life insurance at a lower cost than they would incur should they take out an equivalent individual policy and for the business, it is good for their reputation, builds staff morale and commitment to the business and is a selling point when advertising positions as it reassures new starters that they will be valued.

Especially with the current cost of living crisis affecting many working families and indeed causing up to 37% of the population to consider changing jobs [2], people are extremely concerned about their finances and being part of a group insurance policy can be very reassuring for employees.

What happens if an employee leaves the business?

If an individual who had life insurance provided by their employer as part of a group life insurance policy leaves the business, they no longer have access to their policy and would need to take out a new individual policy should they wish to keep the cover that they have become used to. This applies equally to those that choose to retire or terminate their employment to move to another job and this is not affected by the amount of time served at the company. Should an employee die after they have left the employment of the company that provided their death in service benefit, their family will not receive anything from that particular policy.

In some very rare cases, an employer may be able to make a temporary provision of continuity of death in service cover for an employee who has been made redundant. This is done in special cases to ensure that an ex-employee remains covered by the plan until such time as they are signed up to a new employer’s benefits package. The old cover will typically be time-limited so should a company wish to effect this provision, they would need to confirm the exact requirements and timescales with their insurance company and the individual concerned before the redundancy takes effect.

What are the main benefits of group life insurance for employees?

A key benefit of group life insurance is that medicals are not normally required to be undertaken by people covered by the policy so employees who may not usually be able to access affordable life insurance due to pre-existing medical conditions may find that this is not such a limitation with an employer-provided group life insurance policy.

The policy is designed to pay out a lump sum to the nominated beneficiary of any individual covered by the policy who dies whilst in the service of the organisation that has paid for the policy. This benefit is tax-free for most people.

In addition to the tax-free financial payout that a family or beneficiary will receive should an employee die whilst in service, most insurance companies that provide this type of policy will also offer additional services such as probate support, bereavement counselling by qualified professionals for families and co-workers and a pension for the spouse, parents, dependants or children of the deceased (as determined by the individual named on the policy).

Are there any disadvantages to an employee for being named on a group life insurance policy?

There are no major disadvantages to individuals in being covered by their businesses group life insurance policy, however it is worth knowing that death in service insurance typically pays out less than a traditional life insurance policy so if an individual is concerned that the amount of money their beneficiary would receive wouldn’t be sufficient, it is advised that they take out their own individual life insurance policy as well or instead of the group life insurance policy to provide them with additional protection.

How much life insurance would the average person need?

If an employee is concerned that a death in service benefit will not provide their family with sufficient funds in the event of their death, it is recommended that they consider exactly how much they would require and use this information to decide whether to supplement the death in service benefit with their own personally funded life insurance policy.

Generally, the key things to consider are the loss of an income, the cost of a funeral, continuing requirement to pay existing bills such as mortgage, utilities, food, clothes and childcare [3]. If the individual has outstanding loans or other debts, these should be considered as well. Once these and other annual costs are collated, they should be multiplied by the number of years remaining until the youngest child reaches the age of 18 (or older should you wish to cover university fees). This figure represents the minimum payout that you would require from a life insurance policy to maintain your current lifestyle.

What are the main benefits of group life insurance for businesses?

Whilst the main reason businesses take out group life insurance policies is to recruit and retain talented individuals through the provision of attractive benefits packages, it is useful to know that, depending on the scheme choice, premiums will usually qualify for tax relief as an allowable business expense, providing a financial benefit to organisations as well. Most insurance companies will provide specialist cover for equity partners and limited liability partnerships.

How long does it take for a group life insurance policy to pay out?

There are a number of factors that can affect the duration from a person’s death to the policy paying out, and these are the type of policy, the circumstances of the death and the number of beneficiaries. Because the policy is provided by a business, it also requires the policyholder to provide their input in order to complete the process of paying out. There are some instances where the situation can be quite complicated and the policy could take several months to pay out, but where everything is straightforward it is generally a much quicker process, often processed within a matter of weeks.

In order to speed up the process, it is recommended that each individual on the policy submits a Nomination of Beneficiary Form to their HR department when they join the scheme as, should the policy need to be paid out, this will support the process in moving as efficiently as possible.

How to choose the right policy

In order to make sure that the policy you choose is right for your organisation and employees, it is important to compare the market. Free Price Compare has access to an extensive panel of leading insurance providers and are experts in comparing life insurance quotes to help you select the policy that is right for you, your business and your people.

In order to provide you with quotes, we will need your contact details and information about your business such as what you do, how long you’ve been in business, how many employees you have, the amount of cover that you wish to offer, and if appropriate, the maximum age limit of your employees.

Many group life insurance policies include a “Catastrophe Clause” which means that if a single catastrophic event occurs and is directly responsible for the deaths of multiple employees, then the total liability under the scheme may be capped. If your business is particularly risky or employees are required to undertake potentially harmful work, or to work in dangerous situations, it’s highly recommended that you speak to a specialist life insurance provider to understand what your liability is and how high to set the benefits allowance.

Our customer services team can provide free, independent and impartial advice and our quotes are provided on a no-obligation basis, meaning that we will compare the market for you, presenting you with a wide range of quotations so that you can make an informed decision. We will not pressure you to take out a policy so if you would like to discuss your requirements, please call us today to speak to our friendly, UK based team of specialists.

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