What is Group Life Insurance | Your questions answered

Group life insurance | Your questions answered

Group life insurance, also known as death in service, is an important employee benefit, but there’s often confusion about how it’s calculated and what it means from a tax perspective.

4.04.23

By Alan Boswell Group

Here, we look at how it works and how it can support existing employee financial wellbeing programmes or flexible benefits scheme.

What is group life insurance?

Group life cover is a life insurance scheme provided by an employer for members of staff. It is also known as death in service insurance.

Policies work in the same way as other life insurance plans, except that the employer pays the premium. So, if an employee passes away, the insurance policy will make a payout to their beneficiaries (subject to any conditions set out in the policy).

Who's covered by group life insurance?

As a general rule, eligible employees will need to be UK residents, although there are a handful of exceptions. Otherwise, it’s entirely up to employers who to cover. For example, group life insurance could be limited to managers and team leaders, or it could be extended to everyone employed by the business.

The only stipulation is that businesses cannot discriminate against people who are doing the same job. So, two people performing the same role should expect to have the same level of cover.

When does a group life insurance scheme pay out?

Group life insurance pays out on the death of the insured employee as long as the premiums have been paid.

Crucially, the employee doesn’t physically have to be at work when they pass away for the insurance to pay out, they just have to be actively employed and a member of the scheme at the time.

Is group life insurance subject to inheritance tax?

If the life insurance is written in trust, it won’t be subject to inheritance tax. This is because putting it in trust removes it from your estate and puts it in the hands of your trustees to manage.

Are there any exclusions on a group life insurance policy?

Generally, the only exclusion will be for a catastrophic event, which may limit the total maximum payout per location, although this will depend on the insurer.

For example, if you had 100 employees working at a single site, with a lump-sum benefit of £100k each, the total benefit would be £10 million. If there was a catastrophic event and all 100 employees died, the insurer may cap the pay out at £5 million.

The cap will normally only kick in if four or more people die.

How much does group life insurance pay out?

It’s up to employers to decide how much is awarded. Policies will either pay out a fixed lump sum or a multiple of the employee’s salary.

Payouts based on multiples of salary will usually be between two and four times what the employee earns. For instance, if you earn £50,000 and your life insurance benefit is four times this amount, your beneficiaries would receive £200,000.

What are the benefits of having a group life policy?

Group life insurance provides employees and their beneficiaries with some financial peace of mind. In fact, group life cover can be a key part in an employee benefits service, along with other benefits such as a healthcare cash plan.

Some group life policies also come with added perks which tend to focus on employee health and wellbeing benefits. This could include access to gyms, nutritional guidance, and mental health support and counselling.

Are there tax implications for the business with group life insurance?

Premiums can normally be deducted from a company’s corporation tax liabilities as they should meet the ‘wholly and exclusively’ rules. This means they’re paid for the purpose of the business and make up part of an employee’s remuneration package.

Is group life insurance a taxable benefit?

As premiums are not classed as an employee benefit-in-kind, it is not a taxable benefit, making it extremely tax efficient from both the employer and employee’s perspective.

Do any of the benefits paid out affect the employees’ pension planning?

Due to the changes in the 2023 Spring Budget, benefits paid out won’t affect employees’ pension planning as the lifetime allowance tax charge has been removed from 6th April 2023.

How do I set up a group life insurance policy?

Setting employees up on a group life scheme should be relatively straightforward. Usually, schemes set an upper payout limit, for example £500,000. As long as the employee’s benefit (or payout) stays under this amount, there shouldn’t be any need for additional risk assessments or a medical.

If the level of cover goes over any set limits, employees may need a medical, but sometimes this could be a simple health declaration rather than a physical exam.

Does age matter in group life insurance?

Providers may have age limits, but on the whole, you should be able to enrol employees in a scheme up to retirement age. Some schemes will extend cover up to employees aged 70 or even 80.

Financial planning for business

Ensuring the financial wellbeing of your business and employees can be a juggling act. As independent financial advisers, Alan Boswell Group can take you through a range of employee benefit solutions, including:

Need help with group life insurance?

For more information about how we can help, call a member of the team.

Speak to us: 01603 967967

Please note, the taxation of group life insurance could potentially change in the future.