Group Life insurance | Your questions answered

Group life insurance provides the beneficiary of an employee a lump-sum payment in the event of their death – but there is still confusion and uncertainty around the way the benefit is calculated, tax implications and even the name! We spoke with Adam Revell, Head of Employee Benefits at Alan Boswell Employee Benefits to get all the answers.

What is a group life insurance scheme?

“It’s essentially a life insurance scheme provided by an employer for members of staff. If somebody dies, who works for that company, a payout is made to their beneficiaries, subject to certain conditions. It’s as simple as that.”

Who is covered by a group life insurance scheme?

“That is really up to the employer. They can define who they want covered. They’re called eligible employees. It can be all employees, or it could be all active members of a pension scheme, or it could be employees at a certain level of seniority. So, it really is up to the employer, but what they can’t do is discriminate against employees. So two people doing the same job typically have to have the same level of cover.

“It generally has to be U.K. residents as well. There are exceptions to that, but generally, its U.K. residents.”

When does a group life insurance scheme pay out?

“It pays out on death. The employee doesn’t have to be at work, they just have to be actively employed. There is a common misconception that you have to be at your desk and then die and that is not the case. If you’re employed and the employer is paying the premiums, you’re covered.

“A lot of people call group life insurance a ‘group death in service scheme’ which may explain the confusion. So we need to be consistent with what we’re calling it. group life insurance is the more modern terminology.”

How is the amount to be paid out on death calculated? What’s the benefit based on?

“The benefit will be based on whatever the employer decides. Some firms will have a fixed sum of £X payable on death, or they may have a multiple of salary. Again, you can’t discriminate against employees. So two people doing the same job would typically need to have the same level of benefit. But obviously, different categories of workers can have different levels of benefits etc. A multiple of salary, of say two, three or four times is pretty common. Lump sum payments of between £50k and £100k are pretty common as well.”

And are there any exclusions on a group life insurance policy?

“The only real exclusion, ordinarily, is for a catastrophic event, which is what we going through at the moment with coronavirus. The exclusion with that would be a total maximum payout per location.

“So if you had 100 eligible employees working at one site and they’re all in a group life scheme with a lump-sum benefit of £100k each, the total group life benefit would be £10 million. What the insurer might say is, if there was a catastrophic event and all 100 people died, the insurer would only pay out £5 million because they’re capping the cover, in effect.

“A catastrophic event is generally deemed to be four people or more dying at the same location. The maximum benefit will always be a capped total cash sum and will be detailed on the scheme rules, but it typically kicks in from four people. So if you had up to four people die there’s no cap in place, even if they had huge sums assured.”

How would somebody’s cover end?

“Obviously if an employee leaves their company then they won’t be covered anymore because they won’t be an active employee. But aside from that the cover only ends on cessation of premiums. So like any insurance, while the premiums are being paid the cover remains in force.”

Are there tax implications for the business with a group life insurance scheme?

“Provided the premiums meet the ‘wholly and exclusively’ rules, which they generally do, then any premiums paid can be deducted from any corporation tax liabilities. And they’re not assessed on the employee as a benefit in kind, so it’s extremely tax efficient from both premium paid and benefit received.”

Would inheritance tax need to be paid by the beneficiary of a group life payout?

“The benefit is free from inheritance tax, provided it’s written into trust, which it should be if it is set up correctly.”

Do any of the benefits paid out affect the employees’ pension planning?

“They can, yes. And again this comes down to how the scheme is set up. So, historically, schemes would be set up and the benefits would be assessed against the pension lifetime allowances and that could have a considerable impact on any tax liabilities.

“Everyone’s got a lifetime pension allowance, which is the maximum pension funding they can have before being heavily taxed. [For the 2020/21 tax year it is £1,073,100 and is likely to increase in line with inflation]. If you exceed that, you pay 55% tax on lump sum benefits over and above that. So if you’ve got a £1m pension pot, you’re fine. If you’ve got £1.5m pension pot you’ll potentially be paying a lot of tax. Now, if you had a £500k Death in Service or Life Insurance benefit that would get added to your £1m pension fund. So you’d be paying 55% tax on a very large proportion of that death benefit rather than getting it completely tax free. There are ways to set up certain trusts to avoid that death benefit being added to the pension pot.”

How easy is it to set up a group life insurance scheme? Do employees have to undertake medical underwriting, for example?

Ordinarily not. There will be a free cover limit, which varies per scheme but for medium to larger sized schemes is usually around £500k. If an employee’s benefit is below the free cover limit then no underwriting is required at all. Not many people’s benefit levels will exceed that. If someone’s benefit level does exceed the free cover limit then they would, usually, still only need to do a very basic health declaration. Just a declaration to say what level of health they’re in.

Are there any additional benefits to having a group life policy?

Many insurers will offer an Employee Assistance Programme, which generally focus on people’s health and well-being. So, for example, you could have access to GP’s or specialist consultants, outside of the NHS, nutrition programmes, get-fit programmes, diet support, access to mental health and counselling services as well. Providers will offer different things but they will all, generally, offer some level of GP consultant support, well-being support and mental health support to all staff and their families, with this not restricted to just scheme members.

What information is required from a business so they can get a quote?

Aside from the business details, they just need to supply a simple template detailing basic staff data. That would be name, date of birth, gender, occupation, office location, salary (because the salary tends to be used to calculate the potential benefit) and proposed benefit level; either the multiplier, two, three or four times salary or a fixed lump sum.

About Adam Revell

Adam began his working life in financial services at Norwich Union (as it was back in 1997), where he worked as a Life & Pensions Administrator.

After three years and a year-long spell at Fenton Financial Services in King’s Lynn, Adam joined the Alan Boswell Group in 2001 as a Financial Services Administrator.

Since joining, Adam has progressed through the ranks from administrator to paraplanner to financial planner, whilst at the same time, gaining qualifications to Diploma level. Adam is now a Senior Financial Planner with a vast experience of the corporate as well as the wealth side of financial services, advising both business and individual clients on a daily basis.

Please note, the information relating to taxation is correct at the time of writing in June 2020. Tax laws can change.