How to set up a group life insurance scheme

You probably already know that life insurance pays out a lump sum that can pay expenses or be left to your loved ones when you die. Taking out a group life insurance policy as an employer provides life cover for all of your employees.

It gives your team a death-in-service benefit as one of their employee benefits. Simply put, if a staff member dies during their employment with you, the policy will pay out a cash lump sum benefit to their nominated beneficiary.

How does group life insurance work?

Employers take out group life policies to provide a death-in-service benefit to their staff. This means that employers usually pay the premiums themselves. New employees can be added to the policy as they join the business.

Policies are designed to provide a single payment to an employee's family in the event of that employee's death while they're working for you. They don't need to have died whilst at work or as a result of a workplace accident that you accept liability for.

You can decide how much the policy pays each employee, but it's usually a multiple of their salary. For example, if your policy pays out three times an employee's annual income, the lump sum payment for someone earning £50,000 would be £150,000.

Before setting up a group life insurance scheme, you'll need to determine whether your business is eligible for a group policy. The usual criteria are as follows:

The minimum number of employees

Group life policies are often only available for businesses with at least five staff members. However, some providers offer group policies for companies with only two employees.

Age qualifications

Your insured employees must meet the minimum and maximum age requirements stipulated by your insurance provider. Some offer life cover to employees between 16 and 75, allowing you to cover apprentices and anyone retiring later. Other providers limit cover to those over 18 until the statutory retirement age.

Eligibility to work in the UK

Group cover can only be provided to individuals with a right to work in the UK. They must also have a contract regulated by UK law, even if they work overseas. In practice, this shouldn't be a problem as you'll have carried out the necessary checks before employing them.

Active employment

Insurance will only pay out for people actively working for you at the time of their death. This doesn't mean they have to die at work or due to their employment. Whether they resigned, retired or were made redundant, former employees are no longer covered. Self-employed contractors also won't be included as they don't have a contract of employment.

Technically, an employee who has resigned and been placed on gardening leave should still receive the same pay and employee benefits, so they would be covered until their notice period ends.

Your terms and conditions

You can also place your own criteria on the policy to limit the number of employees enrolled on the scheme. This could be simple as requiring employees to pass their probationary period before joining. Alternatively, you might only offer cover to management staff, for example, line managers and above.

Life cover is a valuable benefit. It shows employees that their employers value them and will give their families some financial security should the worst happen. Aside from being an attractive part of your employee benefits package, your premiums will typically be an allowable business expense, so they can be deducted from your tax bill. That could bring real value in terms of employee retention and attracting new talent.

Most group life cover doesn't use medical underwriting where individual policies typically do. This means employers can provide cover to staff who couldn't afford life insurance because of a pre-existing condition.

If you've decided it's the right time to set up a registered group life policy, here's how to go about it.

Initial decisions and information gathering

There is a range of group life insurance products on the market, so you'll need to start by investigating which one will be the right fit for your business.

Information about your employees

You'll need to gather information about your employees to administer the scheme once it's set up, but your insurers will also need some details to provide advice and give you a quote. They'll use the information you give them to assess the risk associated with providing cover.

Here's what you need to know about each of your staff:

• Their date of birth and current age
• Sex
• Job title
• Salary
• Their usual workplace
• Whether they travel to any high-risk countries in the course of their work.

Level of cover

Consider how much life cover you want to provide. The tax-free lump sum benefits your employee's family will receive is typically a multiple of their salary, but this can vary from double their income to four times their annual salary. You may also include another benefit, such as group income protection, although this will come at an additional cost.

Length of cover

Group life policies cover a fixed term instead of the whole life cover that individual policies offer. You'll need to consider what set time you want to apply. Some policies align with the state pension age. However, if your staff typically work beyond that or retire earlier, you may wish to adjust the length of your cover.

Are there different kinds of group life insurance?

Different providers offer policies with additional features which provide employers with a range of options when selecting the right cover.

These may include the following:

Bereavement counselling

Some policies offer bereavement counselling and other support services to families after an employee's death.

Insurance for a spouse or partner

This allows members to extend the cover to their spouse or partner.

International employees

If you have a non-UK employee working abroad, you can opt to provide cover for them and your UK employees.

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Check you have like-for-like quotes

As employers, the steps you've taken up to this point should have enabled you to obtain several quotes. It's crucial to analyse these and check whether the premiums you've been quoted reflect the same level of coverage. Some quotes will refer to monthly payments, while others are quarterly and annual. You may be offered a discount if you're happy to pay annually.

These are some of the key policy items that you'll need to check:

The free cover limit

Medical underwriting isn't typically used in group life cover; exceptions exist. The free cover limit is the amount of cover an employee can receive before they need to complete a medical questionnaire. What level of cover is available before your policy needs to be medically underwritten?

The unit rate guarantee period

This sounds very technical, but the unit rate is used to calculate the cost of your policy. You may be offered premium rates, which you can lock in when you first take out the policy. The longer the guarantee, the longer you'll be able to benefit from those rates.

Are there any additional benefits?

Some insurers offer additional benefits and support services to employers. These could include group income protection, employee assistance programmes or wellbeing support for scheme members.

Register with HMRC

It's a legal requirement for all group life products to be registered with HMRC. If you've already registered to administer a pension scheme, you can also use this to administer your company life insurance. If not, you'll need to follow the registration process first.

You can then log in at the Pension Schemes Online start page to complete the online application form to register for the scheme. You'll need to select the option to apply to register for a new pension scheme. However, the application form includes an option to register a group life product. You'll be provided a submission reference number when your submission is complete. HMRC will then consider the application and write to the scheme administrator to confirm their decision and give a PSTR number when the scheme is registered.

Administration

At the start of the scheme, it's important to let your staff know about the new benefit and allow them to provide details of their chosen beneficiary. Over time, you'll need to update the scheme with payroll data and gather information from new starters to add them to the scheme.

Your insurer may offer support services to help you with this, or you might have to provide all the relevant information yourself.

The good news is that life insurance premiums typically qualify for corporation tax relief as long as you have a registered group life product. It's also not classed as a benefit in kind for employees, so they won't need to pay additional tax.

Inheritance tax

The structure of a workplace life insurance policy means that it's usually exempt from inheritance tax as a registered group life policy includes a discretionary trust which receives the payout before it goes to the employee's beneficiaries.

The only exception is if the payment results in an employee exceeding their lifetime allowance.

What's the lifetime allowance?

The lifetime allowance was created to simplify pension legislation and look at the amount that an individual receives from their pension scheme and life insurance scheme. The allowance stood at £1.055 million for 2019/20. Benefits over this sum attract a tax levy of 55% or 25%, depending on how they're received.

Excepted group life policies don't form part of this allowance, so setting up an excepted group life scheme can avoid this issue. Your accountant can provide tailored advice on your tax liability and the potential tax implications for your employees. You can also read advice from HMRC here.

Speaking to a registered broker like Globacare will give you the guidance you need to choose the right product for your business. We'll provide an outline of the group life insurance schemes on the market and a comparison quote to ensure you get the coverage and support services you need.