Updated 03 December 2020
Death in Service, life assurance, life cover – whatever you call it, life insurance for employees is one of the most valuable benefits a company can offer, both for the worker and the business itself. However, employers should seek advice on getting a plan to suit their needs. Article by Nick Green.
Employee life insurance is one of the great ‘hidden’ benefits of many jobs. Often just a footnote on job adverts and rarely discussed at interviews, it can end up mattering far more than a company car, share options, pension or even salary if the worst should happen. Often referred to in the past as ‘death in service’ benefit, employee life insurance goes under various different names but always has one vital role: security for workers’ families.
The attraction of this shouldn’t be underestimated. More than ever in our pandemic-conscious world, relatively young people are starting to ask what might happen to their loved ones if they should die prematurely. Building up enough savings to make a safety net is impossible for most, while personal life insurance policies may be expensive and restrictive, reducing their appeal. But the chance to get a quality of life insurance that they couldn’t otherwise get – via their employer – is an incentive that can attract the best people.
However, not all employee life insurance is equal. It’s crucial for employers to choose cover that is a good fit for their employees’ needs and profiles, or they can end up paying over the odds for an unsuitable policy. Which is where independent advice comes in.
Employee or group life insurance will pay out a lump sum to any of your employees who die while employed by you. The death doesn’t have to happen in the workplace, or be related in any way to their work (for this you need employer’s liability insurance). Your company pays premiums – usually a tax-deductible business expense – and in return the policy pays out a tax-free lump sum for any employee death that occurs. This lump sum is usually a multiple of the worker’s earnings. Most companies offer between two to four times salary as a benefit, although typically a payout of up to fifteen times salary is possible.
The most obvious reason for companies to offer group life insurance is cost-benefit: it’s relatively inexpensive to introduce, but employees value it highly because it’s much more convenient for them (as well as more valuable and much cheaper) than taking out personal life cover.
There are relatively low levels of personal life insurance among UK workers, and those that do have it often use it only to cover their mortgage. According to a survey from independent advisers Drewberry, only around a third of workers hold personal life cover. So it’s no surprise that employees like it when their employers pay, providing extra financial security for their loved ones without it costing them a penny.
From your point of view as an employer, group life insurance can act as a powerful talent-magnet working constantly in the background. It helps you:
Group life insurance often includes additional benefits programmes for free. Employees can use these whenever they need to, as they are independent from any claim. They may include:
Every business and group of employees is different, and will have particular needs and priorities. Determining the cost of premiums is therefore quite an involved process, which will take into account factors such as:
â Workers’ ages
â Staff salaries
â Your industry
â Size of your workforce
â Level of cover (i.e. multiple of salary)
â Policy cease age (i.e. the maximum age at which the policy will cover a worker).
Typically, a policy with more workers costs less per employee than smaller schemes, due to economies of scale.
Comparing quotes on different company life insurance plans takes some heavy lifting, and not every business has the time or the tools to do it alone. Firstly, while we as individuals are used to online calculators instantly pulling quotes for policies such as car insurance, no such tools exist for group cover. This is because insurers base premiums on a huge array of factors for what can be hundreds of staff.
Instead, you have to take staff data to each UK insurer to find the best deal for your company and the right fit for your workers. It’s only after you’ve got these quotes and researched each insurer’s offering that you can decide which provider works for you.
Furthermore, Employee Life Insurance requires a trust — no policy can start without one. This is a legal arrangement that exists to receive a payout from the policy before then passing it to an employee’s chosen beneficiaries. The trust structure avoids inheritance tax on the benefit.
There are two options for a trust: setting up and administering your own company-owned trust, or using your chosen insurer’s master trust. Deciding which is right for you can be tricky, as it depends on your circumstances. Therefore this is another area where you might struggle if you go it alone.
A group policy usually requires at least three workers on the payroll. This may exclude the very smallest companies which, despite their size, still want to offer employee life insurance. Fortunately for such companies, an alternative exists known as Relevant Life Insurance. Similarly to group cover, the company pays for it and the payout is a multiple of earnings. However, rather than covering many employees under a single policy, each worker has an individual policy. You can read more about relevant life here.
Although this means employees are underwritten as individuals, with medical history taken, it offers a tax-efficient, company-paid life insurance to small businesses, sole company directors and contractors who would otherwise have to pay for cover personally.
For thriving financial services firm Profile Pensions, taking out group life insurance was an easy decision – a ‘no-brainer’ according to Michelle Donlin, the company’s HR and Office Manager. Michelle said, ‘It’s all about security at the end of the day. If the absolute worst does happen, your nearest and dearest are looked after. Obviously we hope our workers never have to use it, but we still wanted to offer them this security blanket. We work hard to provide good benefits to our staff and show a commitment to our employees, so introducing an employee benefit was really a logical step.’
Michelle arranged the company’s cover with the help of independent advice from Drewberry. She commented, ‘Drewberry spends time getting to know you, what you want to achieve and why you want to achieve it, so you feel like you’re getting proper, holistic advice the whole time. They’re also sensitive to costs and will work with you to ensure your cover is within your budget if necessary, which we were very pleased with.’
The biggest benefit of an independent adviser is that it takes the heavy lifting off your desk. Your adviser visits each insurer for you and reports back, saving you a huge amount of effort. Even better, the adviser’s experience in this field makes it far easier for them to compare different policies and determine which is the best for your needs, and their assessment will almost inevitably be more accurate and reliable. What’s more, reputable advisers benefit from greater market clout than you have as an individual business, which means they may get access to better premiums than you’re able to achieve alone.
Last but not least, an adviser can discuss which type of trust works best for your business – a real bonus for those not used to dealing with such matters. Employee life insurance is the benefit you hope you’ll never need, but the many benefits of having it in place are undeniable.
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