When providing Group Life Insurance, the insurer calculates a ‘free cover limit’ (FCL) for the scheme. This is sometimes also known as a ‘free cover level‘.
For group protection schemes, the free cover limit is essentially the amount of cover that each individual scheme member can have before any medical evidence (underwriting) is required.
For example, a Group Life Insurance scheme covering 50 people may have a free cover level of £750,000. This means that only members who have cover of more than £750,000 would need to complete medical underwriting.
If someone has cover in excess of the FCL the insurer will collect health information on that employee. This is to determine if the insurer is able to accept that employee on ‘standard terms’ (i.e. with normal premiums and no policy exclusions).
For someone with pre-existing conditions the insurer may still look to cover them, they will either place a medical exclusion for the condition or more commonly apply an increase in the rate for the benefit over the Free Cover Limit this is known as a loading.
If due to the outcome of the medical underwriting the insurer declines, the individual will still be covered up to the Free Cover Limit.
The free cover limit usually rises alongside the number of people in the scheme. A small scheme of fewer than 20 lives may have a free cover level of around £500,000. Above this, the free cover level begins to rise, reflecting the increased size of your group.
For large schemes there is usually very little underwriting involved as the free cover limit would be very high.
Medium-sized schemes usually see only senior management needing underwriting as their level of cover tends to be much higher than employees’ cover.
Small schemes may see more people need underwriting, but given the fact that even small schemes tend to have around £500,000 worth of cover with most insurers, this usually suffices.