Your company benefits form a significant part of your employees’ remuneration package. And the first one most employers set up is Employee Life Insurance.
If you don’t have a policy in place yet but want to provide it to your staff, you’re in the right place. We’ve pulled together everything you need to know about putting Employee Life Insurance in place. From how much it can cover, to the costs and benefits associated with it, here’s our expert rundown.
What Is Employee Life Insurance?
Also called Group Life or Death in Service, Employee Life Insurance is a policy that offers your eligible workers a level of life cover. This is typically a lump-sum payment equalling a multiple of the employee’s salary.
Should an employee die while employed by you, Employee Life Insurance pays out a tax-free lump sum to their nominated beneficiary.
It provides financial security to a worker’s loved ones in the event of their death. The payment can be used in whatever way they see fit. For example, they may use the payment to:
- Cover funeral costs
- Pay off an outstanding mortgage or any other debts
- Fund everyday living expenses / commitments.
Why Is Employee Life Insurance Important?
Unlike Workplace Pensions, Employee Life Insurance is not a mandatory employee benefit in the UK. You don’t have to offer it to your team unless you want to.
That said, it’s a good idea to provide Employee Life Insurance since only 1 in 5 employees currently receive it from their employer. By paying for coverage on their behalf, you can help fill this gap. Staff needn’t worry about the cost of Life Insurance, which tends to be a barrier to buying a policy in the first place.
Offering benefits employees actually want can help them to become more engaged and productive at work. While the financial support it offers is key, there are many other benefits to Life Insurance…
How Does Employee Life Insurance Work?
Employee Life Insurance is owned by the company. As the employer, you will set up the policy on behalf of your team. You will choose what level of cover to offer and pay the monthly premiums.
If in the unfortunate event an employee on the policy passes away, a claim can be made. The benefit amount will get paid directly to the employees nominated beneficiary tax free.
Level of Cover
We recently benchmarked over 600 UK SMEs and found that the majority of businesses offer between 2 and 4 times an employee’s salary. So, a worker earning £30,000 a year could be eligible for a payout between £60,000 and £120,000, depending on the level of cover.
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The Employee Life Insurance benefit isn’t liable for Inheritance Tax (IHT), provided the policy is written into trust.
Types Of Group Life Schemes
When it comes to setting up Employee Life Insurance there are two different types to choose from. Registered or excepted. But what exactly does this mean?
Here the policy is subject to pension tax rules. When an employee dies, the lump sum payment counts towards their Lifetime Allowance (LTA). If the benefit amount exceeds this allowance, the employee’s beneficiaries will be liable for a tax charge.
This is the most common type of Employee Life Insurance schemes. It’s also one of the most flexible types as it covers staff who may have differing levels of benefit to insure.
The Lifetime Allowance was abolished by the government starting from April 6th 2023. It’s replaced by an Income Tax charge at the employee’s tax rate on the amount that exceeds the allowance. What this means is that the benefit amount will be treated as pension income.
Current registered schemes can continue to use the same process for taxation. But HMRC will increase the marginal tax rate instead of the LTA charge.
An excepted policy, on the other hand, is the opposite. It isn’t subject to the same pension tax rules as a registered scheme. With this type of policy, the employee’s benefit does not count towards their LTA.
Excepted schemes are best suited to high earners and employees with significant pensions.
Benefits Of Employee Life Insurance
There are many benefits to be had with Employee Life Insurance, both for you, the employer, and your staff.
Benefits For Employers
From an employer’s point of view, setting up an Employee Life Insurance policy helps:
- Attract and retain the best talent
- Reduce staff turnover
- Improve employee morale and engagement
- Reduce stress and absenteeism
- Show staff that you value them and their wellbeing
- Make your business stand out from your competitors.
A comprehensive Employee Benefits package that includes Employee Life Insurance can be the difference between keeping your top talent and losing them to another company.
Benefits For Employees
We understand cost to be a major factor in why many UK citizens don’t have Life Insurance. This is what makes company-paid Life Insurance such a popular benefit for your team.
As staff don’t pay for the benefit, it helps to reduce financial burden for them. It also provides peace of mind that should they pass away, their family will have some financial security.
Another benefit is the fact Employee Life Insurance policies don’t need any underwriting. All your employees are able to get cover, even if they have a pre-existing condition. As a personal policy is underwritten and often excludes pre-existing issues, this makes a group plan more accessible.
Other benefits of Employee Life Insurance include:
- Coverage regardless of the cause or place of death
- Written into trust, the payout avoids Inheritance Tax
- Guaranteed cover as there isn’t any medical underwriting
- Employees don’t pay for the policy, the employer does.
Additional Health And Wellbeing Services
Alongside the core cover, many insurers offer a variety of additional benefits and wellbeing services. Most of which are free with the policy. These aim to support your employees on a day-to-day basis. Some of the benefits we see on policies nowadays include:
- Virtual GP services
- Medical & mental health helplines
- Nutritional support
- Gym and fitness tracker discounts.
Is Your Business Eligible For Employee Life Insurance?
Employee Life Insurance is often one of the first benefits an employer will introduce. But to set it up, you’ll need at least 3 full-time workers on the payroll.
Your employees also need to be:
- Employed with the right to work in the UK
- Within the minimum and maximum ages required by the policy
- An active employee at the company.
Some employers add more eligibility terms which might be specific to their business. For example, you may require staff to pass their probationary period first. Some employers opt for more pay-based criteria.
As long as you meet the basic requirements above, you can choose any extra criteria.
Employee Life Insurance For Small Businesses
But what if you don’t have the minimum number of staff needed for a group scheme? Don’t fret, it’s still possible for you to buy life cover for your team. Small businesses with less than 3 employees are eligible for Relevant Life Insurance.
Rather than one policy that covers a group, Relevant Life provides an individual policy to each member. This does mean that your staff will be medically underwritten, and any pre-existing conditions could be excluded.
This is an employer-paid Life Insurance policy with similar tax advantages as Group Life. It provides the same benefits, including a payout when an employee dies while working for you.
What happens to the life cover if an employee leaves their employment?
If an employee leaves their job, is made redundant or retires, their cover will end. It’s as simple as that.
In some cases, the employee may continue their cover on a singular basis, but this is down to the insurance provider’s discretion.
For this reason, it’s a good idea for staff to take out their own individual Life Insurance to run alongside their company-paid policy. Doing so ensures the individual still has cover even when they change jobs.
How much employee life cover can we provide for our staff?
Most employers choose a multiple of their employees’ salaries as cover. We see most of our clients offer 2 to 4 times their Basic Annual Salary. Although, it is possible to cover up to 15 times.
It’s up to you, as the employer, to select how much cover you provide.
Do we need a trust?
By writing the group scheme into trust, you’re protecting your employees’ lump sum payment.
When managed by a trust, if an employee dies while working for you, their loved ones will get a lump-sum tax free. They will not have to pay any Inheritance Tax as it’s excluded from the deceased’s estate.
Writing the policy into trust also helps to ensure the employee’s chosen beneficiaries are the ones to get the payout. It gives staff more control over the recipient of the benefit when they die.
How Much Does Employee Life Insurance Cost?
Every business is different, which makes it hard for us to give you an exact number straight off the bat. There are many company-specific factors which influence the cost, as well as general policy options.
The pricing will depend on the following key factors, and the insurer you buy cover from.
- Chosen level of cover
The more cover you provide, the higher the risk for the insurer. This will be reflected in the price
- The average age of employees
Older employees are more susceptible to developing a serious illness or suffering an injury. To cover this risk, premiums will be higher
- Group size
The more employees you buy cover for, the higher the cost of a policy. However, larger businesses often get a discount due to economies of scale
- Staff salaries
This will help determine how much you wish to insure each employee for. It’s also possible to set up a policy with different cover amounts depending on what your staff earns. For example, you may insure a higher amount for senior members than junior employees
- Your industry
Naturally, some industries and job roles are riskier than others. Office-based work is typically less risky than the construction industry, for example. The riskier the occupation, the higher the premiums.
Alongside these key contributing factors, insurers may want to know:
- Where employees are based for work
- Whether any overseas travel occurs within your company for work
- If any staff are on long-term sick leave at the point of quote.
Average Cost Of Employee Life Insurance In 2023
As we said, it’s difficult to provide an exact price due to the many factors at play. We can, however, give you a rough idea of what to expect.
The following table shows two example premiums for two of our recent clients. These quotes are based on location and group size. But it’s important to remember prices will vary considerably from business to business.
Given the difference in employee demographic and level of cover, you can see how the cost can differ per employee.
How Is Employee Life Insurance Taxed?
As we’ve mentioned, Employee Life Insurance provides a tax-free lump sum payment if a workers dies while working for you.
The premiums you pay for the group policy are classed as an allowable business expense. This means the premiums are exempt from your yearly corporation tax bill.
For your employees, the good news is that Employee Life Insurance is not a P11D / Benefit in Kind, so there isn’t any extra tax for them to pay on the benefit.
How To Set Up Employee Life Insurance For Employees
Setting up Employee Life Insurance is relatively straightforward. While it’s possible to do yourself, we know comparing quotes and choosing the right scheme can be complicated.
Not only that, you’ll find it hard to get group quotes online as there aren’t any quote calculators available.
At Drewberry™, we work closely with all the leading UK insurers and can do the heavy lifting on your behalf. What’s more, we’re in a unique position to negotiate better rates in most cases.
To set up your Company Life Insurance, the process typically looks like this:
- Benchmark your industry and identify the level of cover businesses in your sector provide
- Our financial advisers go out to the market, using anonymous employee data provided by you, to get the best quotes
- We’ll deliver a recommendation report, detailing our findings
- Then we’ll agree on your final budget and review the policy terms
- If necessary, we’ll negotiate with insurers for better terms in relation to our market research
- A provider is selected and documentation, including trust information, is completed
- We’ll then help you to launch the scheme and communicate it to your staff.
Our support doesn’t end there, though. Part of our service includes regularly reviewing your benefits to ensure they remain cost effective and suitable for you.
Setting Up The Trust Correctly
All Group Life Insurance policies are written into trust to ensure it’s set up correctly. No group policy can go live without one.
What Is A Trust?
A trust is a legal agreement that essentially signs over the benefit amount of the policy payout to named beneficiaries.
Writing a policy into a trust means the payable amount isn’t included in the deceased’s estate. There isn’t any Inheritance Tax to pay on the benefit, ensuring the employees’ loved ones get the full amount without paying tax on it.
The company-paid Life Insurance will be written into trust. Doing so protects the employee’s payout and ensures their loved ones keep the full amount.
As the employer, you have two ways of writing the group policy into trust. You can:
- Set up your own trust and handle administration as the employer
- Use the insurer’s master trust.
Many of our clients opt for the insurer’s master trust, as it’s a convenient way of managing the Group Life policy. In a trust, the trustees manage the policy and handle the claim payout when needed. It saves time and reduces how much admin you’ll have to do.
Without a trust, IHT is payable at 40% on assets worth over £325,000, meaning beneficiaries could lose nearly half of the payout.
Whichever option you pick, it’s crucial that the trust is set up properly as it can impact who the benefit is passed to in the event of an employee’s death.
We understand that this can all sound a bit complex, so if you’re unsure about trusts and how they work, please don’t hesitate to get in touch with us. You can pop us a call on 02084327333 or email email@example.com.
How Does Employee Life Insurance Fit In With Other Employee Benefits?
Employee Life Insurance is relatively cheap and easy to set up, and staff value it highly. It also provides a good foundation for the introduction of other benefits, including:
- Group Critical Illness Cover
Group Critical Illness pays out a tax-free lump sum if an employee develops a critical illness, such as a heart attack, cancer, or stroke
- Group Income Protection
Working in conjunction with your company’s sick pay policy, Group Income Protection offers a monthly income to an employee if they’re medically unfit to work
- Business Health Insurance
Business Health Insurance, pays for private healthcare, allowing your staff to bypass NHS waiting lists and receive prompt care for acute medical conditions
- Corporate Health Cash Plan
A Corporate Health Cash Plan provides monetary support to staff, in the form of cashback, for their everyday medical expenses. This typically includes routine dental and optical services, but can also include cashback for prescriptions and pain-relieving therapies.
Compare Best UK Employee Life Insurance Companies 2023
As an independent Employee Benefits consultancy, we work closely with the UK’s top insurers to help find you the best scheme for your team.
The insurers we have access to include:
- Canada Life
- Legal & General
Once we’ve done our research and received quotes from the best Life Insurance providers, we’ll send you a personalised report with our findings. Our expert team will recommend an insurer that they believe will provide the best cover and service levels to your staff.
Need Help? Get Free Expert Employer Life Insurance Advice
Setting up an Employee Benefits Package for the first time can seem a daunting prospect, especially when you’re already busy trying to run your business. That’s where we can help.
We do all the heavy lifting for you, so you can focus on what you do best. We’re experts at helping businesses set up their benefits and ensuring that they have the best policy for their employees at the best price.
You can reach us on 02084327333 or email firstname.lastname@example.org.
Why Speak to Us?
We started Drewberry™ because we were tired of being treated like a number.
We all deserve a first class service when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.