What is Group Income Protection?

What is group income protection insurance?

Typically, a group income protection scheme is set up and owned by an employer. It makes financial support available to employees if they get injured or fall ill and have to stop working. It’s usually a short-term measure, designed to help them get by until they’re fit to go back to work. Payments from a GIP are lower than an employee’s salary - usually a maximum of 70%.

Because the policy is owned by the employer, the employee can’t make their own claim - this must be done by the employer, who receives the money from the insurer and then pays the employee. This payment is treated in the same way as taxable earnings, so the employee will pay income tax on it.

How is a GIP funded?

Since group policies are owned by employers, they are the ones who pay the premiums. It’s not like pension schemes in which both employer and employee make contributions. Some employers may calculate the level of an employee’s salary to take account of the income protection, which means the employee would be effectively contributing without knowing. However, in most cases it's simply part of the salary and benefits package, funded entirely by the employer.

The main features of group income protection insurance

GIP schemes share many characteristics with individual income protection policies:  

• Level of cover: GIP policies usually pay a percentage of the employee's salary, often ranging from 50% to 75%. If an employee gets injured or falls ill and has to take time away from work, their employer will claim on the insurance, receive the monthly payout and pass this on to the employee. 
• Waiting period: This is the period between the employee stopping work and the start of the benefit periods. It’s set out when the employer takes out the policy. The most common waiting periods are 13, 26, or 52 weeks but can be shorter or longer. During this period, employees can receive Statutory Sick Pay or any other sick pay which their employer chooses to pay.
• Benefit period: The maximum length of time for which benefits will be paid is specified in the policy and is usually set at 2, 3, 4 or 5 years. In some cases it can last until retirement. If the employee is able to return to work before the end of the maximum period, the benefits will stop. 
• Inability to work: Just as some individual policies cover you for different levels of inability to work, GIPs sometimes include options for:
  • Own occupation: This covers you if you’re unable to do your usual job.
  • Suited occupation: This is a wider definition, which means you can’t do your usual job and you’re unable to do a different job that’s appropriate to your abilities and salary.
  • Any occupation: This is the broadest category. This will cover you only if you’re unable to do any job at all.

Many GIP policies provide additional services such as rehabilitation support, employee assistance programs (EAPs), and return-to-work schemes. These can play an important part in helping employees recover, which is good for both the employee and the employer.

Alternatives to Group Income Protection

If you’re not covered by a group scheme, or you’re in one but not satisfied with the benefits, there are a couple of other ways to make sure you can meet your expenses and maintain your lifestyle.

Individual income protection

You can arrange your own income protection insurance, which has the major advantage over GIP of being customisable so that it meets the demands of your particular needs. GIP schemes sometimes operate on the principle of the lowest common denominator, with exclusions, limitations and levels of cover designed to cover the largest number of employees. If you take out your own policy you can decide how much cover you want, up to 70% of your income and any restrictions will be based solely on your own circumstances, not those of your colleagues.

Savings

You could set aside a proportion of your income every month and build up a savings fund for emergencies. You can even earn a modest amount of interest on the sum. The drawback is that the amount of help it gives is limited by how much you’ve saved, and once you’ve spent it you’ll have to start building it up again. Income protection insurance gives you the cover you need from the day you take out your policy and you can claim as often as you need.

Benefits

It may be possible to claim Universal Credit when you’re too sick to work but, as is the case with statutory sick pay, it’s very unlikely that you’ll receive anything like your normal salary. You could use it to top up your emergency fund, but bear in mind that if you have more than £16,000 in savings you may not be entitled to Universal Credit.

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Group income protection and tax

An important difference between GIPs and individual policies is the tax implication. The government has made more than one attempt to clarify the position but there are still areas of uncertainty. Basically, the employer owns the policy, claims the benefit and pays it to the employee. This is treated as taxable income, unlike individual policies where the payouts are tax-free.

It’s also possible that cover under a GIP will be treated as a taxable benefit, like a company car or gym membership. That means employees could pay tax on the premiums paid by their employer, since it’s being done on their behalf.

Disadvantages of group income protection

GIPs don’t have the flexibility of individual policies. These are the main drawbacks.

Customisation

GIPs are largely a one-size-fits-all mechanism. This means there’s little or no opportunity to customise cover for individual needs and circumstances. Policy terms are usually set for the whole group.

Employment-related

Group schemes are usually tied to your employment. Once you leave the company, you will no longer be covered. 

Limits on eligibility and cover

There may be restrictions on the illnesses or injuries covered by a GIP plan. This is mostly to accommodate the potentially large number of people who are members. There might also be exclusions for pre-existing conditions or high-risk activities, which means you’ll still be covered, but not for illnesses or injuries connected to anything that’s excluded.

Conclusion

Group Income Protection is popular with both employees and employers, providing significant benefits for both. As it gives financial support to employees during periods of long-term illness or injury, it forms an important part of any employee benefits package. Employees can feel secure and they are also likely to feel valued and looked after by their employer. For employers it is an effective way of promoting the wellbeing of their employees, maintaining good morale in the workplace. If your employer operates a group income protection scheme it’s a sign that they take their responsibilities seriously, although you should make sure you understand exactly how it will work for you.