Weighing up options when picking critical illness and income protection

There’s a host of considerations in picking critical illness and income protection, says Sam Barrett

With a variety of group risk products on offer, it can often be difficult for employers to decide which should be included in their employee benefits package.

Two products that are commonly considered alongside one another are group income protection (IP), which pays an income when someone’s unable to work due to long-term sickness or an accident, and group critical illness (CI) insurance, which pays out a lump sum if someone is diagnosed with a life-threatening condition. Glenn Laming, group protection sales director at Legal & General, says: “We do get requests from companies that are thinking of replacing their group income protection with group CI but the two aren’t really comparable.”

While both perks pay out when an employee is seriously ill, there are marked differences in the benefits they provide in the workplace. Group IP will ensure an employee receives an income if they are unable to work, but is more of a benefit for employers. Alex Pickard, senior consultant at the PMI Health Group, says: “Group IP mitigates the cost of long-term absence, not only be replacing salary costs but also by managing the claim with support such as rehabilitation [or] return-to-work programmes.”

He adds that it can be particularly useful where an employer offers a final salary pension scheme or has made a promise of ill-health early retirement. “Where the pension picks up these costs it can be a drain on the fund, which can look particularly bad now the pension is included in FRS17 accounting,” Pickard explains.

The other key benefit of group IP is the support insurers can provide to employers around changing legal requirements by keeping them up to date with their responsibilities.

Although income protection tends to cost employers more than group critical illness insurance, it often has a much lower visibility and some employers may even avoid actively promoting it to staff, for fear they will all go off on long-term sick leave. “This is silly really as the insurer will detect anyone who is swinging the lead and reject their claim,” adds Pickard.

However, group CI is much more of a benefit for employees. Simon Bailey, head of marketing for employee benefits at Aegon Scottish Equitable, says: “Employees understand what group critical illness cover is because it is well known in the individual market. It’s also cheaper to buy cover through the employer than if the individual bought it themselves, which means it can be a well-appreciated benefit.”

The lump sum payment, however, could be seen as an incentive not to return to work. Consequently, the majority of group CI cover is made available through flexible benefit schemes, with the cover offered in much smaller blocks than if an individual was taking it out to protect their mortgage.

The two products are also very different in terms of claims. While, most types of claims under group CI schemes would be eligible for payment on group IP if the employee were unable to return to work, the same is not true in reverse. Indeed, the two main causes of claims under group IP – mental health and musculo-skeletal problems – wouldn’t qualify for payment under group CI cover.

Perceptions of the two benefits may alter in the future. Group CI might become more of an employer benefit on the back of claims pressures on private medical insurance due to the cost of the new generation of cancer drugs. Nick Homer, senior propositions development manager at Norwich Union Healthcare, explains: “Group CI cover could be sold as a separate cancer add-on to take some of the risk away from the medical insurance scheme.”

Ultimately, if employers can’t afford to put both group CI and IP in place they should consider their objectives, says Pickard. “Group CI insurance is a cheaper and more visible benefit but if an employer wants to protect themselves from the cost of long-term sickness then group IP is a better option,” he explains.

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Cover and cost
While premiums will very according to age and risk profile, these are typical premiums for cover:

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