Group Life Cover
When joining a company, you may be eligible for group insurance benefits, including life and disability coverage, as well as severe illness and funeral coverage in some cases. One advantage of group schemes is that they often provide more affordable premiums compared to individual policies.
Additionally, some group plans offer a certain level of coverage without requiring medical underwriting, such as health questionnaires or medical exams. If you need more extensive coverage, you may have the option to purchase additional coverage with limited underwriting requirements.
Numerous companies provide their staff with attractive employment benefits, including retirement fund membership and group life insurance. By offering these perks, employers can enhance their salary and benefits packages, fostering a sense of financial security that encourages employee loyalty.
Notably, the group life cover offered as an employee benefit can be significantly more cost-effective than purchasing individual life and disability insurance. This is because the premium rates are determined by the collective demographics of the employee group and industry, rather than individual risk factors assessed by life insurers for personal policies.
Typically, group benefits encompass life and disability insurance, often tied to your salary, such as a lump sum payout equivalent to two or three times your annual salary.
Alternatively, some employers offer income protection coverage in the event of disability, rather than a lump sum. Additional benefits like funeral coverage and/or severe illness protection may also be included. A basic group life insurance policy might come with a ‘free-cover limit’, which waives the requirement for medical tests or questionnaires for benefits up to that limit.
This can be particularly advantageous if you’re having trouble securing individual coverage due to pre-existing medical conditions or premium loadings. Furthermore, you may have the option to purchase additional coverage beyond the free limit, subject to the life insurer’s risk assessment and corresponding premium.
The costs of Group Life Benefits differ among funds and are typically calculated as a percentage of employees’ salaries. If contributions are made through your retirement fund, inquire about the specific cost to understand the percentage of total contributions allocated to the fund on your behalf. Generally, group cover is more affordable than individual policies due to several factors:
- Average premium rates per rand of cover apply to the entire group, resulting in cross-subsidization among employees of different ages, occupations, and health statuses.
- Individual factors like education level, health, smoker status, and hazardous activities are not considered in determining premiums, although certain exclusions may apply.
- Compulsory participation by all employer group members spreads the risk across a diverse group, reducing costs for the insurer compared to individual policies.
- Economies of scale benefit the insurer when covering a large group, leading to lower costs.
- While young, healthy, highly qualified individuals might find cheaper individual cover, group benefits often provide more affordable rates for many employees.
How Group Life is Funded
Group life benefits can be funded through various methods. When offered via a retirement fund, the fund covers the premiums, but the costs may be offset by deducting from either the employer’s contributions, employee contributions, or a combination of both.
A common approach is for the employer to increase their fund contributions, allowing the cost of group life and disability benefits to be deducted from this amount. In this case, the premiums are considered a fringe benefit, but employees can claim a tax deduction for their fund contributions, effectively offsetting the fringe benefit, as long as total retirement fund contributions remain within the allowable tax-deductible limit.
Alternatively, if benefits are provided through a standalone employer scheme outside of the retirement fund, the employer pays the premiums, and the benefit is treated as a taxable fringe benefit added to the employee’s salary.
When group life benefits are offered through a retirement fund, the fund absorbs the premium costs, which are typically covered by employer contributions, member contributions, or a combination of both. In contrast, standalone group life schemes provided by an employer are funded by the employer, but are considered a fringe benefit and added to your taxable income.
The costs of group life coverage are generally more affordable than individual policies due to the diversified age range of the group, which remains relatively youthful as new, younger employees join. Additionally, administrative expenses and broker commissions are lower for group policies, and participation is typically mandatory for all group members.
Key Features
- Employer-sponsored: The company pays the premiums or shares the cost with employees.
- Group-based: Covers all eligible employees, often with a minimum number of participants.
- Standardized coverage: All employees receive the same level of coverage, unless tailored otherwise.
- Cost-effective: Premiums are often lower than individual life insurance policies.
- Tax benefits: Premiums are tax-deductible for the employer, and the death benefit is tax-free to beneficiaries.
- Employee benefit and retention: Provides a valuable benefit to attract and retain top talent.
- Tax efficiency: Reduces taxable income and provides a tax-free benefit to employees’ beneficiaries.
- Risk management: Transfers the risk of employee deaths to the insurer, ensuring business continuity.
- Social responsibility: Demonstrates care for employees’ well-being and financial security.
- Competitive advantage: Enhances the company’s reputation and competitiveness in the job market.
- Simplified administration: Easy to manage, as the insurer handles claims and administration.
- Customization: Can be tailored to suit the company’s needs and budget.
Questions to ask your employer
- What is the extent of my life coverage through my employer? Is it a multiple of my salary, and if so, what income is it based on?
- What type of disability benefit do I have – a lump sum or income replacement? If it’s a lump sum, how will I need to manage it to generate an income?
- Until what age will my income protection benefit be paid if I become disabled?
- Will my other benefits, like life cover, remain in place if I become disabled?
- What is the waiting period for disability claims, and is temporary disability covered?
- How is disability defined in my policy, and could I complement it with individual cover?
- Can I increase my coverage beyond the free limit, and is it more cost-effective than individual cover?
- If I leave my employer, can I convert my group cover to individual cover?
- What exclusions apply to my policy, such as hazardous activities or foreign travel?
- Is there a severe illness benefit, and how much is it? What illnesses are covered?
- Is there funeral cover, who is eligible, and what is the payout amount?
Many employees are unaware that their group life schemes offer a conversion or continuation benefit, allowing them to transfer their group cover to an individual policy. This option, although slightly more expensive, can be highly beneficial. If available, the life insurer guarantees conversion to an individual policy priced according to your age at the time of leaving the group scheme, without extensive medical questioning or testing. This means no exclusions, loadings, or waiting periods, unless previously applicable. Your premium rate will be the insurer’s standard rate for your age, gender, and other factors.
Even if your new job offers group life cover, consider using the continuation option to supplement or complement the new scheme’s benefits. A financial adviser can help explore your options, including conversion.
IMPORTANT: If your employer is covering the costs of your group life and disability insurance, it’s essential to verify that premium payments are being made if the company experiences financial challenges.
In the event of an employer’s non-payment of contributions to your retirement fund, the trustees should be notified and, in turn, inform you of the situation, unless they have reason to believe the employer will promptly rectify the payment shortfall and resume covering the life and disability benefit premiums.
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Don't assume your Group Life Cover is enough
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Read the MoneyWeb article HERE
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Read the Investec article HERE