Buyer’s guide to group income protection (December 2008)

Group income protection products have undergone much development in recent years, providing more flexibility, says Nicola Sullivan

The past few years have seen a number of changes in the way employers offer group income protection, as well as much product development, with providers adding options such as rehabilitation services to schemes. But despite these advances, the main purpose of group income protection remains unchanged.

The benefit provides an income for employees who cannot return to work after a long-term illness or injury. This is paid after they have been absent for a predetermined time, commonly known as the deferred period.

Historically, group income protection policies have provided staff with monthly payments amounting to 50% of salary up to the age of 65 years, after a deferred period of six months. However, in recent years it has become more common for employers to choose the length of the deferred period, the period for which the policy is payable, and the amount that is paid to employees in the event of a long-term illness or injury. For example, employers that are keen to keep costs to a minimum may opt for less expensive policies that pay out for a fixed period ranging from two-to-five years.

Group income protection typically costs 1% of an organisation’s payroll. For example, it would cost about £500 a year to insure an employee earning £50,000. The price of premiums also depends on the age of the employee and the risks associated with their job.

The way in which cover for long-term absence has been provided to employees has changed over the years, possibly contributing to group income protection’s appeal, says Nick Homer, senior proposition manager at Norwich Union Healthcare. Historically, many employers financed long-term absence through defined benefit pension plans, but these in many cases have been replaced with defined contribution schemes leaving only the member’s accumulated pensions available to meet the cost of early retirement.

This has meant that both employers and the market have looked for alternative ways to provide employees with support. Apart from just offering income protection as a core perk, employers have started to provide it through flexible benefits schemes, giving the employee the option to flex up or down on the amount of cover provided. Paul White, head of risk benefit consulting at Aon Consulting, says: “Historically, group income protection was entirely company paid with no flexibility. In recent years, we have seen it offered within flex schemes as a core benefit, with employees given the choice to flex up or down.”

Some employers even choose not to cover the cost of premiums, but simply use their purchasing power to negotiate deals with providers to enable employees to buy policies at a discounted rate.

Group income protection products have moved further into the limelight with the introduction of the Welfare Reform Act in October. This replaced state incapacity benefits with an employment and support allowance, which will see claimants’ capabilities assessed and support given to get as many back to work as possible. Although the legislation places no direct responsibilities on employers, it gives greater clout to providers, many of whom use the rehabilitation aspects of their products as a selling point. Some providers, including Unum, also provide early intervention programmes to try to help employees return to work before it becomes necessary to make a claim. Steve Browning, group protection product manager at Friends Provident, says: “There is no doubt that the earlier you are able to assess a potential claimant and work out whether they are suitable for rehabilitation, the more beneficial it is to the employee, the employer and the provider.” EB product file: group income protection What is group income protection? Group income protection provides an income for employees who are unable to return to work due to a long-term illness or injury. This is paid after they have been absent for a predetermined period.

Where can employers get more information? Industry body Group Risk Development (GriD) may be able to provide further information at Providers include: Bupa Group Risk, Canada Life, Friends Provident, Legal & General, Norwich Union Healthcare, Aegon Scottish Equitable and Unum.