A death-in-service benefit, which pays out a lump sum to family members if an employee dies suddenly, is the second-most-valued benefit after private medical insurance.

Thirty-seven per cent of employees say that group life insurance is one of the top three benefits they want from an employer.

Yet, according to insurance broker Drewberry, only 13.7pc of small businesses offer group life insurance to their employees.

>See also: Can you afford not to offer business medical cover to your staff?

For any small business thinking about expanding its employee-benefits package, a group life insurance scheme is the perfect complement to a workplace pension and is often the first building block.

For an employer, benefits of offering group life insurance include:

  • Attracting the best talent
  • Improving employee retention
  • Giving employees peace of mind
  • Being seen to be a paternal employer

Some policies also provide free access to Employee Assistance Programmes and other benefits, such as online GP services.

In a tight labour market – unemployment remains at or near record lows – recruiting and retaining employees is more important than ever.

>See also: What happens when a small business owner dies?

What is group life insurance?

Also known as death-in-service benefit, group life insurance insures staff against untimely death and takes care of their family by paying out a lump sum, often equivalent to 2-4 times an employee’s basic salary.

Employee benefits of group life insurance

In 2018, 42pc of people went without life insurance because it was too expensive. Offering group life insurance lets employees know their loved ones are taken care of financially if they died without having to pay a penny for the cover. Having an employer provide them with a policy may take a load of employees’ shoulders.

How big does my small business have to be to offer group life insurance?

Most insurers ask for a minimum of five staff when offering a group life insurance policy, although some will cover fewer.

What if my micro-business only has one or two employees?

If your small business has one or two employees, you could offer Relevant Life Insurance, where each employee has their own individual cover but still receives the same tax benefits as a group scheme. The employer puts the policy into a specific trust to benefit from the same tax efficiencies as one receives with a group scheme.

Another benefit is that some Relevant Life Insurance providers allow your workers to keep their plan by moving it to a personal life insurance policy if they choose to leave the company.

Do staff have to undergo a medical exam?

Generally, you don’t have to take a medical exam or answer medical questions to enrol in a company group life insurance plan.

Insurers calculate premiums for group plans on risk characteristics of the group as a whole, not on personal factors about staff.

Can I bolt on benefits to group life insurance?

Yes, additional support such as bereavement counselling is often available.

How much does group life insurance cost?

As a business owner, it’s worth knowing that your own life insurance can be half the price of what you would pay for cover as an individual.

The same goes for your employees – it would be worth pointing out to employees, so they better understand how much they can save.

According to Drewberry, the average cost of a £100,000 benefit is only £100 a year per employee. So, for a small company with five staff, the insurance may only cost £500-£1,000 a year.

How is group life insurance benefit taxed?

Premiums paid by an employer are not treated as a P11D benefit for employees, so there is no tax charge. And the premium payment is considered a business expense for corporation tax purposes.

How can I ensure my employee’s family avoids paying inheritance tax on the pay-out?

Claim payments are paid to a discretionary trust, so there is no inheritance tax charge for employees.

However, where excepted group life schemes are set up in a flexible and voluntary arrangement and the cover is paid for by the employee, premiums will be subject to income tax and national insurance contributions.

What is an excepted group life scheme?

A registered group life insurance scheme counts towards an individual’s lifetime allowance total, whereas an excerpted group life scheme does not.

Excepted group life insurance is sometimes used for high earners.

What is my lifetime allowance?

Simplified pension legislation was implemented in April 2006 introducing the lifetime allowance.

For 2019/20 the lifetime allowance is £1.055m.

Benefits that count towards the lifetime allowance include registered pension and lump sum death benefits from registered group life insurance schemes, whereas an excepted scheme does not.

Benefits that exceed the lifetime allowance are subject to a tax charge of 55pc when taken as a lump sum, or 25pc if taken as income (in addition to any income tax). The tax charge is payable to death-in-service beneficiaries.

Excepted group life insurance schemes pay-outs are not included in the calculation of the lifetime allowance.

Why do you need an excepted group life scheme?

An employer should have an excepted scheme set-up for employees who have applied for enhanced protection or fixed protection.

Employees can apply for enhanced protection or fixed protection now that the Government has reduced tax allowances to protect their existing registered scheme pension.

Employees must adhere to additional restrictions on their registered group life scheme membership. If they don’t keep to these restrictions, they will lose their enhanced protection or fixed protection and may have to pay more tax when they receive a registered scheme benefit.

How much does an excepted group life scheme cost?

Normally there is no difference in cost between an excepted scheme for some members of your staff, but it will result in two separate policies being in place.

However, you will need to set up a separate trust and trustee bank account.

Do I need to consult a financial adviser?

As we have seen, setting up a group life insurance scheme can be time-consuming and complicated with different levels of cover and needs.

Given the potential complications, you may want to use a specialist insurance broker, like Drewberry Insurance, to advise you on your policy options and compare quotes on your behalf.

Further reading

Employees choose protection over pay rises

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