Income protection insurance pays an income if you're unable to work because of illness or injury, including both physical and mental health issues.
Income protection will typically pay between 50% and 75% of your regular income to allow you to keep paying your bills while you're away from work. It doesn't cover you if you're made redundant.
An employer takes out group income protection to provide cover for their employees. The employer pays the monthly premium, and any employee who's part of the scheme can then claim financial support when they're away from work.
There is typically a deferred period, also known as the waiting period, which is the amount of time you need to wait between becoming absent from work and starting to receive financial support. The length of the deferred period typically depends on the company's sickness absence policy. Some employers will offer full pay for a few months, while others will move employees straight onto statutory sick pay.
As an employer, you can choose the group income protection insurance that works with your business needs and budget, setting the deferred period and how much the policy pays out.
Does group income protection insurance only cover employees' income?
The coverage that group income protection provides depends on the policy you choose. However, it could cover employers' National insurance contributions, payments into pension schemes and the cost of hiring additional staff to cover absences.
You can also allow employees to claim a lump sum if they are diagnosed with a serious illness or need to retire early due to their illness or injury.
Income protection coverage offers benefits to both employers and employees. Here are some of the main advantages.
Benefits for employers
Attracting the best talent
Employees have shown an increasing willingness to leave their jobs for a higher salary, greater job satisfaction, and improved work-life balance. A high-quality benefits package can help you to become an employer of choice.
Offering group income protection insurance shows that you value your staff and want to support employees even when they're unable to work.
In addition to the tax advantages, group income protection coverage can provide other financial protection, depending on your chosen policy. Long-term absences can incur additional expenses, for example, in hiring additional staff to cover your employees' duties whilst they're unable to work. Income protection cover can provide additional funds to cover those costs.
You may also be able to arrange coverage to fund your employer's National Insurance contributions and pension contributions.
Health and wellbeing support
Some insurers offer health and wellbeing services as an optional extra with their group income protection policies. You may already have some of these services if you provide group health insurance. These services can act as preventative measures to help your employees avoid ill health and ensure a successful return to work after an absence. Your insurer will provide an expert case manager to help you manage the support services you offer.
An employee assistance programme can include training to support employees in managing stress and improving their mental health and counselling for more direct support. It can also help them to improve their physical health. This can give you a more engaged workforce and could allow you to reduce the costs associated with third-party rehabilitation services.
Benefits for employees
A guaranteed income
Needing to take time off work because of illness or injury can be stressful. When your employer offers group income protection, this will replace your income while you're away from work. That means you can focus on getting better without worrying about paying the bills.
Looking after your family
If your income drops because of an absence, it could impact your and your family's quality of life. On the other hand, your income protection payments can allow your children to continue their usual activities, making a sickness absence less stressful for everyone.
If you become ill and need rehabilitation support to help you recover, this may be available as part of your income protection. This could include physical rehabilitation services such as physiotherapy or mental health support.
Wellbeing support services
Even if you're in good health, your employer may provide support to enable you to manage stress, look after your mental health and improve your physical wellbeing to help prevent issues in the long term. For example, an employee assistance programme can include access to health education and counselling.
How does income protection taxation work?
The monthly premium on a group income protection policy is an allowable business expense, so it is tax deductible against corporation tax.
However, this means the payments themselves can be taxable. An individual income protection policy is paid out of income already taxed, so the payments you receive when you make a claim aren't liable for income tax. However, when an employer pays the premiums, that money hasn't been taxed.
The amount that group income protection pays is usually set to reflect this. For example, an employer can set the payment amount at up to 75% of an employee's salary, while an individual policy usually only pays up to 65%.
The cost of income protection depends on several factors.
The overall cost of your premiums depends on the following:
- The level of cover you choose and how much you want the policy to pay during an absence.
- The deferred period you choose - how long employees must wait before the policy starts paying out.
- How long you want the policy to pay out - short-term cover is cheaper than long-term cover, which can pay out until the employee's retirement date.
- Whether you opt for guaranteed or reviewable premiums - guaranteed premiums are fixed throughout the policy's life and are typically cheaper in the long run.
- Whether you want your payments to be index linked, so they increase with the cost of living.
The cost of your insurance policy will also depend on these factors relating to your employees:
- The average age of your workforce - the older they are, the higher your premiums will be.
- Their sex.
- The nature of your business and whether it's generally low or high-risk.
- Individual occupations within the company.
- Average salaries.
- Whether your employees routinely travel to work in high-risk areas.
Income protection coverage can give your employees peace of mind but can be costly. Other types of insurance may be worth investing in, depending on your circumstances.
Critical illness cover
Critical illness insurance provides a lump sum if you're diagnosed with a serious illness. It will only pay out once and is restricted to a list of conditions specified in the policy. This type of cover can be helpful if your health issues mean that you need to make adaptations at home. If you receive a terminal diagnosis, it can also allow you to spend time with your family without worrying about the bills.
As an employer, you can pay the premiums yourself or make this a voluntary scheme where employees choose whether to join and pay the premiums themselves.
As an employee, this can allow you to access coverage at a lower cost than an individual policy.
Group life insurance
Life insurance pays an employee's family a lump sum when they die. It can also pay part of the benefit if they're seriously ill. This doesn't replace income protection coverage but is a valuable additional benefit.
As we've already mentioned, you may want to consider critical illness cover if your employer doesn't provide it. There are also specific insurance policies that can provide cover if you're unable to work.
Mortgage protection insurance
Mortgage protection insurance will pay out if you cannot work because of illness or injury, but it can also cover your mortgage if you're made redundant.
Accident, sickness and unemployment insurance
This type of insurance pays an income if you're away from work because of illness or injury, but it also covers you if you're made redundant or lose your job. However, it won't pay out if you resign, take voluntary redundancy or are fired. Group income protection policies usually cover you if you're absent because of a pre-existing medical condition. However, these are typically excluded from an ASU policy.
Payment protection insurance
Payment protection insurance is designed to cover the payment of specific debts, for example, car finance payments or a personal loan. You'll typically take it out when you sign the loan agreement.
Get in touch
Our specialist brokers provide a bespoke service to help you find the right income protection coverage for your employees. Get in touch with us for a comparison quote.
Frequently asked questions
What is group income protection insurance?
Group income protection coverage is an insurance policy that provides employees with an income when they can't work due to sickness or injury. The business pays the premiums to cover its employees.
How will my business benefit from offering income protection to employees?
Income protection coverage is a valuable benefit that can help you to retain existing staff and attract new talent. It can also help you cover the costs of employee absence, for example, by paying NI or pension contributions or hiring new staff. Many insurers also offer support services, including wellbeing and rehabilitation support.
What's a deferred period?
The deferral period is the time that an employee must wait after they become absent from work and before their income protection payments start. The deferred period you choose can vary depending on your company's sick pay policy and overall budget.
Are income protection payments tax-free?
If your employer provides your income protection, you must pay income tax on any payments you receive. That's because the insurance premiums qualify for corporation tax relief, so the money used to pay for them has yet to be taxed. However, if you take out an individual policy, your payments won't be taxed.