Individual vs group income protection: what's the difference for your employees?

Income protection pays your employees a percentage of their usual salary when they can't work due to illness or injury. Statutory sick pay (SSP) pays £123.25 per week for up to 28 weeks of absence, which means your staff will likely receive significantly less than their usual earnings and may quickly find themselves in financial difficulty. Income protection cover provides them with financial support for longer and pays more. It gives employees time to recover without worrying about the bills or rushing back to work before they're ready.

Investing in a group income protection scheme lets you provide enhanced sick pay for the cost of a premium. This makes it a cost-effective approach, particularly if you need to pay for temporary cover during their absence.

Insurers offer individual and group income protection policies. Let's consider some of the similarities between the two policy types.

Deferred period

When an employee becomes absent due to illness or injury, income protection policies don't start paying out immediately. The deferred period is the time between the start of the absence and the start of payments. It's typically at least 4 weeks, although many insurers offer longer periods that let you tailor your coverage to your needs and budget.

If you provide group income protection benefits and your employee decides to purchase an individual policy, they may choose a longer deferral period to reduce costs. In that case, they'd only need to make a claim under their policy in the event of long-term illness or injury. In practice, the main difference for employees is that they can set their own deferred period via a personal policy, whereas you set it via a group policy.

Definition of incapacity

Some insurance policies, such as critical illness insurance, have complex definitions of incapacity and disability that employees must meet for a successful claim. For example, the policy definition might say that an employee can't claim if they can work in some capacity, even if they can't perform their usual role.

That isn't the case with income protection insurance. Payments are based on an individual's inability to perform their usual job duties. This can make the claims process more straightforward, as you don't have to get into arguments about whether they could change to another role, take on light duties or work part-time. You'll likely have these conversations with your HR team and consult with an employee, particularly in the event of long-term illness. However, it doesn't affect their eligibility for payments under your group income protection policy. The definition applies to both personal and group income protection benefits. Some personal policies may have a stricter definition of incapacity, which your employee will need to consider when choosing the right coverage.

Policy exclusions

Income protection policies typically use medical underwriting to gather information about an employee's medical history. Your employee will need to provide medical information when they buy an individual policy. Still, the situation with group income protection can be more complex, depending on the policy's terms and conditions.

In general, insurers can and do apply exclusions to both individual and group income protection cover. Some are standard exclusions that apply to every policyholder. These typically include self-inflicted injuries, illness or injury resulting from drug or alcohol misuse, criminal acts or involvement in a war.

Exclusions based on pre-existing medical conditions vary depending on the policy terms and an employee's medical history. With individual policies, an insurer may provide cover but increase the premiums paid to reflect the increased risk that your employee will claim. However, under both policy types, absences due to the pre-existing condition may be excluded.

Access to well-being services

If you provide your staff with health insurance or life cover as part of their employee benefits package, you're likely familiar with the well-being services that come with those policies. However, both individual and group income protection policies can also provide access to a range of well-being services. These vary depending on your chosen provider, with some services only being available via group income protection policies.

Both individual and group income protection policies can offer the following services.

Virtual GP appointments

Virtual GP appointments include telephone and online video consultations with a GP and are available 24/7, so your employees can seek health advice that fits with their schedule.

Health helplines

Telephone helplines are typically nurse-led and provide general health information.

Mental health support

The mental health support available varies, but typically includes access to counselling sessions in a similar way to health insurance. Members can also access other support services for mental health information and guidance.

Member reward programmes

Member reward programmes offer rewards and discounts. Some are available to every member, while some providers let you earn rewards by engaging in healthy behaviours.

Rehabilitation services

Rehabilitation services typically vary between group income protection and individual policies. They both support employees' well-being. Group income protection places greater emphasis on work-related rehabilitation services, such as providing adaptive tools to support employees in making a successful return to work. Insurers can also liaise directly with HR and managers to discuss reduced hours or other adjustments.

Group income protection can also provide access to employee assistance programmes, which offer 8-10 counselling sessions and telephone helplines with general guidance on legal and financial matters and signposting to other sources of legal or financial support.

Investing in group income protection for your staff brings you a range of business benefits closely linked to the support it provides to employees.

Employee benefits

Group income protection benefits employees in various ways. It offers financial support when they fall ill, allowing them to continue paying the mortgage and other bills while maintaining their lifestyle. You pay group income protection premiums to cover your staff, so they don't need to fund the premiums themselves. Alternatively, they can invest in an individual policy for additional coverage. Income protection payments are typically significantly higher than statutory sick pay and can continue for longer if they face long-term illness or injury.

The well-being services and rehabilitation support can also promote faster recovery.

Advantages for employers

When you include group income protection in your employee benefits package, you can support employees during periods of illness or injury in a cost-effective way. As an employer, you face a choice between paying an absent employee in full, which could be costly during a lengthy absence, or limiting their income to statutory sick pay. Group income protection benefits let you support your staff for the price of an insurance premium, freeing up funds to enable you to hire temporary staff if needed. Some policies can also cover other expenses, such as pension contributions and employer National Insurance contributions. Group income protection premiums are also typically an allowable business expense for corporation tax purposes. This means you can deduct premiums from your bill, making income protection cover a tax-efficient employee benefit.

While group income protection has significant financial benefits, investing in coverage shows your employees you value them. Offering a financial safety net increases staff retention and engagement and can lead to a more productive workforce. In turn, this can boost your company's reputation and make you an employer of choice.

We've considered the advantages of providing your staff with group income protection benefits and discussed the similarities between individual and group income protection policies. Now, let's look at the differences between the two. The most obvious difference is that an individual policy covers only one person, whereas a group policy can cover your entire workforce. When an employee joins a group scheme, they don't have a say in the terms and conditions that apply, but with an individual policy, they can choose one that meets their needs.

Let's consider the differences in more detail.

Joint coverage

Insurers design group income protection policies to cover multiple individuals with differing medical histories and health needs. They set premiums based on the likelihood that someone will claim and assess the risk based on group demographics, such as the average age of your workforce and the type of work you do. As we've mentioned, policies use medical underwriting, but there are often differences in how exclusions are applied. Insurers will accept many employees onto a group policy without any medical checks.

By contrast, individual policies don't offer any joint coverage. This differs from other policies, such as health insurance or life cover, which offer joint policies for couples or families. Individual income protection covers one person and is based on their circumstances and medical history.

Salary percentage

As we've mentioned, group income protection benefits pay a percentage of an employee's usual salary while they're away from work. The percentage available varies by provider, but on average, group policies pay a higher percentage than individual cover. Group income protection benefits typically pay up to 80%, with individual policies paying up to 70%.

The difference lies in the way the premiums are paid. Employees pay individual premiums from their net salary, which has already had income tax and national insurance deducted, whereas group income protection payments are based on an employee's gross earnings.

Group income protection payments are higher to reflect that income tax and national insurance contributions will be deducted before they receive their payment.

Taxation and payments

We've already mentioned the income tax and national insurance position: payments from individual policies are tax-free. In contrast, group income protection payments are subject to income tax and national insurance contributions.

When communicating with your staff about their group income protection benefits, it's worth explaining that they won't need to take any action to pay income tax on any payments they may receive. In practice, income tax payments work in the same way with both their usual salary and income protection payments. You process both via your PAYE system, making the relevant deductions and paying HMRC directly.

Payment term

One of the main advantages of income protection cover is that it pays out for a much longer period than statutory sick pay. The payment term a policy offers determines how long an employee can continue to receive payments during an absence. There can be significant differences between group and individual policies depending on the type of individual policy an employee chooses.

Group income protection policies have shorter payment terms than individual coverage. You can choose the payment term that applies to your group policy, but most providers limit payments to a maximum of 2 years of absence. This likely reflects that an employee can only receive payments from their group income protection benefits while they're employed by the company that pays the premiums. After a lengthy absence, you'll likely be considering adjusting an employee's duties, or even a medical retirement if they can't return to their own occupation.

By contrast, an individual policy can provide long-term coverage. Individual short-term policies have payment terms similar to a group scheme and can provide payments for up to 2 years. However, insurers also offer long-term coverage to individuals. These policies can continue to pay out until an employee returns to work, regardless of the length of the absence. In practice, a policy can provide coverage for the whole of an employee's life or until their expected retirement age. Premiums for long-term policies are typically higher than those for short-term coverage.

Paying for insurance

Group and individual policies both offer a choice of monthly or annual premium payments. Choosing monthly payments can make it easier for you and your staff to budget effectively. You’ll likely pay your employees monthly, and your invoicing systems may follow the same pattern. However, you can choose an annual premium if you prefer.

With an individual policy, your employees must arrange their own payments and handle any renewal paperwork. Setting up payments is typically straightforward, as they can arrange a monthly direct debit to pay their insurers automatically.

Under a group policy, your staff must set up payments and handle administrative tasks. From your employees' perspective, that means they save money and spend less time on paperwork.

Making a claim

Insurers can have different processes for claiming on an income protection policy. However, the main difference between group and individual policies is in the person responsible for dealing with the insurance company.

If your employee has their own policy, they must contact their insurer to notify them of their absence and begin the claim, providing any documents or additional information the insurer may need.

With group coverage, your staff will claim on an employee's behalf and liaise with the insurer. This can ease the pressure on an employee as they'll have less admin to deal with, which can mean less stress when they're ill. Your HR and occupational health staff can also coordinate to arrange rehabilitation. The employee will also receive payments through your PAYE system as normal.

Taking your insurance with you

When an employee buys income protection cover, they own the policy, and it stays with them even if they have several different jobs during their working life.

Group income protection is tied to their employment with you, as you pay the premiums to provide coverage as part of your employee benefits package. If an employee leaves, their coverage ends. Some insurers let employees pay to extend their coverage while they make other arrangements. This can be useful if their new job doesn't include income protection in its employee benefits and they need time to choose a personal policy. Some insurers may offer employees the option to convert their group cover to a personal one. However, both of these options are relatively rare. It can be a good idea for employees to invest in their own policy so they know they're covered regardless of what a new employer might offer.

Income protection insurance helps your employees pay the bills and protects them from financial stress when they can’t work due to illness. Including group income protection in your employee benefits package demonstrates your commitment to their financial security, but it’s vital you choose the right policy for your needs. Contact us for tailored advice to help you compare quotes and make an informed decision.

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