Risk products have rewards

This article is brought to you by our sponsor Friends Provident.

Group risk products benefit employees as employers can play on economies of scale and even cover those in poor health, says Bob Cheesewright, group risk marketing manager, Friends Provident

Group insurance as an employee benefit plays a very significant part in the financial planning of our country. According to Swiss Re, 9.2 million people were covered by such policies at the end of 2006. Estimates show that between 35% and 40% of UK staff have employer-sponsored life cover with a total sum insured of £533 trillion.

The economies of scale in processing group policies mean that employers can usually purchase cover more cheaply than we could buy it ourselves; but there is a further very significant benefit. Cover is available for people in poor health that often could not be insured if they were buying the policy themselves.

When the policy covers everyone in a defined category of staff, insurers do not concern themselves that a claim form will immediately follow a proposal. Insurers will set a level of cover beneath which they will not enquire about health or lifestyle. This is usually described as a ‘free cover limit’ because that cover is free of evidence of health. It simplifies administration, cuts costs and of course is enormously valuable for the staff involved. It is very common to see free cover limits of £1 million under a group life insurance scheme. For example, in one recent case only 13 out of 5,000 employees were asked to provide evidence of good health and that only applied to the extent that their benefits exceeded £1 million.

A wide range of benefits can be provided and larger firms may be able to self-insure.

Group life insurance cover can be arranged so that the benefits are not subject to inheritance tax and premiums are not a benefit in kind for the employees. The insurance usually provides a lump sum of perhaps two or four times salary. An annuity of perhaps 50% of salary can be provided for dependants.

With group income protection, the premiums are again not treated as a benefit in kind. The insurance maintains income if accident or ill-health prevents working for a prolonged period often set at around six months. A typical level of cover of perhaps 75% of salary inclusive of state benefits might be chosen to protect essential lifestyle while ensuring an incentive to collaborate with rehabilitation and return to work. Pension contributions can also be maintained. Insurers offer rehabilitation support wherever it might be helpful and if a return to work is not practical they will usually pay direct if the employer decides to dismiss on grounds of disability.

Critical illness cover, however, is rarely provided by employers but is popular in a flexible benefits package. It provides a lump sum on diagnosis of one of a list of “dread diseases” including strokes, heart attack or cancer. Premiums paid by the employer are treated as a benefit in kind.

There is an element of irony that government action to prevent age discrimination has unquestionably curtailed the growth of employee benefits designed to protect vulnerable people and their dependants. Pending interpretation of the legislation by the courts, employers must rely on consultation and good communication to objectively justify the positions that they choose to adopt.

In conclusion, insurance as an employee benefit is something people value. It has a huge role in our social welfare and it would be good to see the regulatory burden eased. There is no doubt properly executed schemes, which are well communicated with objective justification for the design decisions taken, have a vital role to play.

The views and opinions in this article are those of our sponsor, Friends Provident, and do not necessarily reflect those of www.employeebenefits.co.uk.

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