Group risk: Income protection versus life insurance

If you read nothing else, read this…

• Television advertising has boosted employer awareness of group income protection (GIP), but life cover remains far more popular.

• GIP premiums tend to be more expensive than life cover, but the product can reduce absenteeism costs significantly.

• A trend towards limited-term GIP could make cost less of an issue for employers.

Case study: Law firm makes case for full life cover

All 230 staff at law firm Moore Blatch belong to its group income protection (GIP) scheme and all except the partners, who have separate partnership cover, are also members of the firm’s group life scheme.

The GIP scheme, provided by Unum, covers 50% or 65% of salary, depending on seniority, until retirement and costs 0.86% of payroll. The life scheme, from Legal and General, covers two-times salary and costs 0.17% of payroll. All staff learn the value of their package via an annual benefits statement.

Christine Chalk, operations director at Moore Blatch, says: “Life cover is now a fairly standard benefit, but GIP can make a difference at job interviews as people often ask about it. It also has an impact on the bottom line, as Unum offers a lot of help in getting sickness absentees back to work quickly.”

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Group income protection trails group life insurance in popularity, but it can reduce absenteeism costs and limited-term cover makes it more affordable, says Edmund Tirbutt

Awareness of group income protection (GIP), which pays out a regular income to staff in the event of long-term sickness or disability, has been boosted by television advertising by Unum and Aviva.

Intermediaries believe the campaigns have helped employers to introduce GIP products to staff, and Unum reports that 10% of employers have started to do so in the last six months alone.

Nevertheless, GIP continues to be far less popular than group life insurance. According to the Employee Benefits/Alexander Forbes benefits research 2012, published in May, 78% of employers offer life cover to all staff and 14% to some staff, compared to 37% and 22%, respectively, for income protection.

According to Swiss Re’s Group watch 2012 report, published in June, annual spend on group life was £956 million in 2011, while spend on GIP was £518 million. This is despite the fact that GIP, unlike life cover, offers employers early intervention and rehabilitation benefits that can cut absenteeism costs.

Nick Homer, proposition development manager at Zurich Corporate Risk, says: “GIP needs to be considered within a broader health and wellness strategy, as it can support the efficient operation of a business and help to manage its costs. Premiums have dropped by more than group life premiums in the last few years, but ironically this has not affected relative demand.”

Four-times-salary life cover typically costs less than 0.5% of payroll, whereas the broadest GIP cover tends to cost between 1% and 1.5%.

Ron Wheatcroft, technical manager at Swiss Re Life and Health, says the average premium per scheme in 2011 was £20,031 for group life, with an average of 172 lives per scheme, and £29,930 for GIP, with an average of 106 lives per scheme.

But a trend towards limited-term GIP, which pays out for only two to five years and can cost just 0.25% of payroll, could make price less of an issue. According to Swiss Re’s report, limited-term already accounts for 11.7% of all GIP schemes.

Paul Avis, sales and marketing director at Canada Life Group insurance, says: “Life cover has little value for single people with no dependants, but GIP does, so advisers should perhaps look at offering less life cover and combining it with budget GIP, which can offer extras such as employee assistance programmes.”

A survey published by Group Risk Development (Grid) in February 2012 showed that in 2010, GIP paid out 13,571 claims totalling £292 million, while group life paid out 8,212 claims worth £745 million. Grid spokesperson Katharine Moxham says: “The survey shows both products offer good value, but GIP premiums cannot be compared directly with annual claims because income protection claims are long-term.”

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Read more articles from the Employee Benefits group risk supplement 2012