Group life insurance is a popular and valuable addition to businesses that want to offer employees free life insurance as part of a package of benefits. However, some businesses struggle to understand where to start, how to qualify and how much it will cost to offer life insurance to staff in this way.
In this article, we explain group life insurance, how to qualify as a business, the different types of schemes and how they work. We will also show you how to source the best group life insurance scheme for your business and find the best rates.
What is group life insurance?
Group life insurance is an insurance scheme that provides life insurance through businesses for employees and equity partners, usually in the form of a death-in-service payment if they should die.
The group life insurance scheme can provide different levels of life cover for the members of the scheme and this can be altered at annual reviews. The amount that is paid on death is usually a multiple of the member's gross annual salary if it is set up to pay a lump sum on death, or it can be paid as an income that is usually a percentage of the employee's salary.
The business pays for the group life insurance scheme so employees benefit from free life insurance.
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Who should consider buying group life insurance?
Group life insurance offers small, medium and large businesses the ability to extend life insurance to their employees. Life insurance provides value for people from all backgrounds and circumstances and can enhance employee benefits leading to improved staff engagement and retention. Employees, including directors and equity partners, can get life cover that is paid tax-free through a trust without disclosing their health details, and in some cases, group life products can offer cover to those who may not be able to arrange life insurance on a personal basis due to health and lifestyle risks.
Which businesses qualify for group life insurance?
Any business with a minimum of 3 employees upwards can qualify for group life insurance. Not all group life insurance providers use the same qualifying criteria for their group life insurance products and the following factors can vary:
- the minimum number of employees required to start a scheme
- the free cover limit before medical information is needed
It is usually best to speak with a specialist business insurance adviser* who will be able to discuss your business needs with you to find the most suitable group life cover schemes.
If your business doesn't qualify for group life insurance but you would like to offer life insurance benefits to some key people in your business then there are some other life insurance solutions to explore. These include keyman insurance, relevant life cover and shareholder protection insurance. You can read more about these business insurances in our article, "What is the difference between shareholder protection, keyman and relevant life insurance?"
What are the benefits of group life insurance?
A group life insurance scheme provides several benefits for businesses and employees and can be a very good investment.
How group life insurance benefits businesses
- The premiums are an allowable expense so they can reduce corporation tax
- The benefits attract recruits through enhanced remuneration packages
- The benefits help with staff retention
- Equity partners allowed to join schemes
- Employee assistance programmes can aid businesses to support employees during periods of ill health
How group life insurance benefits employees
- Peace of mind for insured employees as their families and dependents can receive a lump sum of cash to prevent financial hardship if they die
- Group life insurance schemes are usually paid through a trust which means that the payout will avoid any inheritance tax
- Employees who would otherwise need to buy personal life insurance can save money
- No extra tax to be paid by employees as group life insurance is not a P11d benefit
- Enhanced feeling of being valued by your employer
- Access to employee assistance programmes for health and wellbeing
What type of group life insurance scheme will suit your business?
Group life insurance schemes exist in two different forms and each has its own advantages and restrictions which should be considered before you choose which type of scheme works for your business.
Registered group life insurance scheme
A group life insurance scheme that is registered with HMRC is referred to as a registered group life insurance scheme. It can be set up to provide a lump-sum payment in the event of an employee's death or a regular income which is referred to as a Death in Service Pension (DISP). If you are covered for a lump-sum benefit then that cash lump sum counts towards a member's Lifetime Allowance (LTA). Members with Enhanced, Fixed or Individual Protection will lose this if they join a registered group life scheme. And, although equity partners can join a registered group life insurance scheme, the scheme must include employees as well. It should be noted that the Lifetime Allowance was abolished as of April 2024 and may not apply to new group life insurance scheme members as well as existing ones.
Excepted group life insurance scheme
An excepted group life insurance scheme is not registered with HMRC so the treatment of this type of scheme falls outside of how an occupational pension scheme would be treated. The money within the trust for excepted group life insurance schemes could be subject to periodic and exit charges. There are a few advantages to setting up an excepted group life insurance scheme; any lump sum paid out does not count towards a member's Lifetime Allowance; if the member has Enhanced, Fixed or Individual Protection, they cannot lose this and you can set up an excepted group life insurance scheme that is for the benefit of equity partners only.
Registered group life insurance vs Excepted group life insurance
| Registered group life insurance scheme | Excepted group life insurance scheme |
| Registered with HMRC | Not registered with HMRC |
| Lump sum life insurance and Death in service pension that pays income allowed | Only lump sum life insurance allowed |
| Payout counts towards your Lifetime Pension Allowance (LTA) | Lump sum payout does not count towards Lifetime Pension Allowance |
| Enhanced, Fixed or Individual Protection holders could lose LTA protection | Enhanced, Fixed or Individual Protection holders will not lose LTA protection |
| Equity partners can be scheme members but not exclusively | An equity partners only scheme is possible |
The Lifetime Allowance was abolished as of April 2024 so you should check whether the limits would necessarily apply to a member
How to apply for group life insurance
Group life insurance applications start with getting a quotation which is based on:
- the number of members in the scheme
- the level of cover
- the location where members work
- members' occupational duties
Usually a Free Cover Limit - a threshold under which there is no need for members to share medical information (medical underwriting) - will apply, and this may vary between insurers. Medical underwriting is the process that insurance companies use to assess members' health and lifestyle.
The application will need to be supported with the Pension Scheme Tax Reference (PSTR) if it is a registered group life insurance scheme.
Other types of group insurance you should consider for employees
Businesses can arrange group protection schemes that include other types of insurance for their employees outside of life insurance. These include:
- Group Income protection insurance - protects employees' earnings during periods when they are unable to work due to illness or injury. For more information, read our article "What is group income protection and is it worth it?"
- Group Critical illness insurance - provides a lump sum payment to employees if they are diagnosed with one of a number of listed medical conditions
- Group Health insurance - provides access to private medical treatment that can help avoid NHS waiting times. You will find more information about health insurance for employees in our article "Small business health insurance".
Sourcing the best group life insurance schema at the best price
Group life insurance providers such as Aviva, Legal & General, Zurich, Unum and Canada Life provide some very good material to support businesses in understanding what their group schemes offer. Every group scheme will vary slightly from the next as insurance companies have unique guidelines for qualification to their group life insurance scheme.
Most insurance companies will provide quotations directly to a business that is looking to start a group life insurance scheme but will not provide advice as part of their service. Essentially, the business has to make its own decisions about which insurance company's scheme is best for it and how to structure the group life insurance scheme for the benefit of its employees. This can be challenging as there are various tax implications to consider as well as the advantage of specific perks that one insurance company may provide over another.
The best way to source a group life insurance scheme that suits you and your business is to speak with an independent specialist business insurance adviser*. Specialist advisers who provide business insurance solutions are very well-versed in the different group schemes that are available across the market and will provide the advice and guidance that insurance companies usually won't. This means that you can discuss all of your business needs; what you want to achieve as well as how much you would like to spend on putting the group life insurance scheme in place.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. This link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article
