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What is a Free Cover Limit in Group Protection?

I’ve had a quote from an insurer for group income protection and there is a section on the quote that states a free cover limit. What is a free cover limit and what does this mean?

Question asked by Darrell Plant

When providing Group Life Insurance or Group Income Protection quotes, the insurer will calculate a ‘free cover limit’ (FCL) for the scheme. This is sometimes 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.

How Does the Free Cover Limit Work?

For example, a life insurance scheme covering 50 people may have a free cover level of £750,000, which means that only members who have a level of cover over £750,000 would need to complete a medical questionnaire for underwriting.

If someone has cover in excess of the FCL the insurer will collect health information on that employee and determine if they are able to accept that employee on ‘standard terms’ (i.e. with normal premiums and no policy exclusions).

For someone with pre-existing conditions it is possible that the insurer may need to raise the premium (common) or place a medical exclusion of the plan for that individual (less common). Naturally, the insurer could simply outright decline cover for that individual.

How is the Free Cover Level Calculated?

The free cover limit is usually calculated as a fixed amount of cover multiplied by the number of scheme members. As a result, the larger the scheme the higher the free cover level.

In the example above, it was assumed that each employee at a company with 50 employees attracted £15,000 in ‘free cover’, which totals for a FCL of £750,000.

For large schemes there is usually very little underwriting involved as the free cover limit would be very high. For medium sized schemes it is often only senior management that require underwriting as their level of cover tends to be much higher.

For small schemes it used to be the case that a large proportion of members would require underwriting. However, some insurers have started offering advisers (such as ourselves) a fixed free cover limit for small schemes that is way above what that scheme would otherwise have attracted, such as a free cover limit of £500,000 for a scheme covering just 5 people.

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Ronald Lofkin
25/07/2019
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