What is group income protection?
GIP pays a regular monthly benefit if an employee is unable to work because of long-term illness or injury. Benefits are payable until the employee returns to work or, if earlier, state pension age, or for a fixed payment period, typically two to five years. GIP can also provide rehabilitation support, including access to treatment and advice on adapting an employee’s work arrangements.
What are the origins of group income protection?
The first income protection schemes, known as Holloway schemes, were introduced in 1875, paying retirement benefi ts in addition to an income in the event of incapacity. The modern GIP began in the 1950s.
Where can employers get more information and advice?
Industry body Group Risk Development (Grid) is a good source of information, including insurer and intermediary details. See its website.
What are the costs involved?
Full cover costs from 1% to 1.5% of gross payroll, but it can be just 0.25% for a limited-term policy.
Any legal implications?
GIP was exempted from default retirement age legislation, enabling employers to stop providing it when staff reach the state pension age, currently 65.
What are the tax issues?
An employer can usually get corporation tax relief on premiums and it is not considered a P11D benefit.
What is the annual spend?
Swiss Re’s Group watch 2012 report, published in April 2012, shows in-force premiums totalled £518m in 2011.
Which providers have the biggest market share?
Unum has around 50% of the market and Canada Life 20% Others include Aviva, Friends Life, Legal and General, Metlife and Personal Group.
Which have increased share?
Ellipse and Zurich Corporate Risk have grown their businesses.
11.7% of employers feel stress/mental health issues are the top health risk to their business
Source: Employer research 2012, Group Risk Development, November 2012
21% of GIP schemes incorporate a limited payment term
Source: Group watch 2012, Swiss Re, April 2012
Group income protection (GIP) is an insurance policy that covers employers for the cost of long-term employee absence. Policies typically cover gross salary, overtime, commission, bonuses and pension contributions for staff unable to work because of injury or long-term illness.
A standard policy pays an employee between 75% and 80% of annual salary following a predefined waiting, or deferred, period of 26 weeks after they first become absent. The benefit is paid to the employer, which passes it on to the employee. It can rise by a fixed percentage or in line with the retail prices index (RPI) to helpit keep pace with inflation.
How much an employer pays for cover depends on a range of variables, such as employees’ age, gender, occupation and claims history. The premium will also be affected by the features selected, including the level of benefit; the waiting period before the benefit becomes payable, with premiums falling the longer this is; and the length of time the benefit is paid.
Traditionally, GIP benefits are paid until the employee returns to work or a selected retirement age, whichever is earlier, but it is now possible to take out a limited-term policy. These pay out for two to five years, reducing the cost of cover by up to two-thirds.
Limited-term policies are growing in popularity, especially among organisations that are introducing GIP for the first time. As well as suiting budgets, this also fits new working patterns, with many employers arguing that because few people have a job for life, they should not be required to pay benefits until retirement.
But not everyone is a fan of the limited-term approach. Some argue that, for the employee, the money might stop just when they need it most, and for the employer, it can be difficult to end payments so they will feel compelled to self-insure. Also, where a full scheme is already in place, reducing the benefits can affect staff morale and involve changes to contracts of employment.
Some employers aim to soften the blow with a lump-sum payment to the employee at the end of the term. Many insurers offer this option and the payment is typically one to five-times annual salary. It can be used to help the employee train for a new career, take early retirement or as a redundancy payment.
Another approach that frees employers from long-term liability is a contract, such as Unum’s Pay Direct. With this, if the employee leaves service, the insurer can make the payment directly to them, allowing a clean break.
Share the cost
Insurers have also explored ways to share the cost of cover between the employer and the employee. Although GIP is not a big seller through flexible benefits schemes, some insurers have developed products that allow staff to make a contribution to the cost of cover.
Personal Group offers a voluntary GIP product, which is paid for through salary sacrifice but allows employees to enjoy a group-rated product. Another product, Unum’s Select, offers flexibility around funding, allowing the employer to pay a fixed monthly amount for each employee, with the individual topping up their cover; pay up to 75% of the employee’s premium; or allow the employee to fund 100% of their cover.
Another key benefit GIP gives is support for rehabilitation. Insurers recognise that the longer an employee is off work, the lower their chances of returning, so it is in their interest, as well as that of the employer and the employee, to help get the individual back to work as quickly as possible.
To enable this, insurers ask employers to notify them quickly of any potential long-term absences, even if it is months before the benefit starts being paid. They can then case-manage the absence, providing medical treatment where possible, and drawing up a return-to-work plan for the employee.
Rehabilitation can include a return to work on a part-time basis or into a lower-paid post. In such cases, the insurer often still pays a partial benefit so the employee is not out of pocket.
Because early notification is vital to the success of rehabilitation services, some insurers offer a reward to employers that notify them of any absences within a set time period. For example, Legal and General will give employers with schemes covering at least 250 staff a bonus of 5% of the annual premium if they notify the insurer of at least 80% of all potential claims within the first four weeks of absence. Likewise, Ellipse’s Interact plan offers a 10% premium reduction if absences are notified promptly or if no employee is absent for more than four consecutive weeks in a year.
Insurers also recognise that, because claims can be few and far between, employers appreciate a range of added-value benefits that can be used regardless of whether benefits are being paid out. Such extras can often help to reduce the likelihood of claims. A common freebie is an employee assistance programme (EAP), which provides telephone-based support and information on anything from parenting concerns through to management issues and mental health problems.
Although the service is usually a cut-down version, it often include an option to upgrade to a full EAP with face-to-face counselling or to extend coverage to all staff rather than just those in the GIP scheme.
Absence management services are also becoming common as an add-on, especially because they can give employers early warning of potential problems. Ellipse offers one in its InteractPlus plan, with notifications automatically going through to the insurer.
Some of these added-value services support the employer as well as the employee. For example, Canada Life’s BusinessCare service gives employers online and telephone-based business and legal support, and Unum’s Lifeworks Legal offers advice on HR, employment law, health andsafety and intellectual property.
Although insurers have beefed up their products with freebies in recent years, competition has meant that premiums have remained stable, but this is expected to change.
The low-interest-rate environment is putting pressure on insurers’ reserves and this is likely to result in rates hardening over the next year or two, with some observers predicting increases of as much as 20%.
This level of price rise could make some reduced-cost options, such as limited-term policies and voluntary schemes, appear increasingly attractive.