Group income protection

Most people meet income protection as a personal product. The group version works differently in one way that matters: the employer is the policyholder, not the employee. The employer buys cover for a defined group, usually all employees or a category of them, and the insurer prices it on the group rather than on individuals.

That has a practical consequence. Because the insurer is underwriting a group, most members are usually covered without answering medical questions at all, up to a level of benefit the policy sets. It also means the employee has no contract with the insurer: the arrangement is between the employer and the insurer, and the employee is a person the policy covers.

The purpose is to keep some income flowing during a long absence, after whatever sick pay the employer provides has run out. It is not a lump sum and it is not a health service.

It tends to be considered where a long absence would leave someone with nothing much to live on, and where the employer cannot absorb open-ended sick pay. That describes a lot of small and medium employers: the statutory floor is low, and a discretionary policy of full pay for a while stops being affordable at some point that nobody has usually decided in advance.

It is less obviously useful where an employer already provides long-term sick pay contractually, since the two overlap, or where the workforce is small enough that the insurer wants individual medical underwriting anyway, which changes both the price and the experience of buying it.

It is worth saying plainly: whether it is right for your organisation is a question about your workforce, your existing arrangements and your budget. That is a regulated conversation, not something a guide can answer.

These are features that appear often. Whether any of them is in a particular policy, and on what terms, is a question for that policy document.

Commonly present, subject to policy terms:

• A proportion of earnings, not the whole of it. Policies typically replace part of salary, and often define what counts as earnings in a way worth reading.
• A deferred period: a waiting time between the absence starting and any payment, chosen by the employer, often lined up with how long the employer pays sick pay.
• A payment period: some policies pay until retirement, others pay for a limited number of years and then stop.
• Rehabilitation and early-intervention support: many insurers provide help aimed at supporting a return to work, sometimes from the point of notification rather than the point of claim.
• A free cover limit: a level of benefit up to which members are covered without medical underwriting.
• Bundled extras: some policies include support services such as an employee assistance programme. Whether these are included, and for how long, varies.

This section is deliberately not a list of standard exclusions, because there is no standard. What follows is the set of things that decide whether a claim pays, each of which is set by the policy rather than by the market.

Ask which way each of these goes in yours:

• The definition of incapacity. Policies differ on whether someone must be unable to do their own occupation, a suited occupation, or any occupation at all. This single definition does more to decide claims outcomes than the headline percentage does.
• Cover above the free cover limit. Employees whose benefit would exceed it are usually individually underwritten, and may be accepted on different terms or not accepted. People often do not know they are in this group.
• Actively-at-work conditions. Cover for a new member or at a scheme change may depend on them being at work on a given date.
• Pre-existing conditions. How these are handled varies, and is often the difference between a policy that helps the person you are thinking of and one that does not.
• Offsets. Benefit may be reduced by other income the person receives, including state benefits, depending on the policy.
• What happens when payments stop. If the payment period is limited, the policy says what happens at the end of it, and the employment questions that follow are the employer's, not the insurer's.

The employer holds the policy, pays the premiums and is usually the party the insurer pays. The employee is then paid through payroll in the normal way.

The tax treatment is the part most often misunderstood, so it is worth stating with its source. HMRC's position is that the provision of an employer's scheme does not constitute a taxable benefit for the employee unless it is provided under optional remuneration arrangements. HMRC also states that the right to receive sick pay or the prospect of receiving it is not a benefit chargeable under the benefits code. So in an ordinary employer-paid arrangement, the cover itself is generally not a taxable benefit in kind for the employee.

What is taxed is the money when it arrives. Payments passed to the employee are generally taxed as employment income, and HMRC describes an exemption for a just and reasonable part of payments in proportion to premiums the employee paid, with any part of the payments they receive that do not qualify for the exemption taxed as employment income.

Salary sacrifice changes this picture. Arrangements provided under optional remuneration arrangements are treated differently, and it is worth confirming the position with your accountant before structuring it that way.

Written for you to reuse. Adapt it, but keep the qualifications, because the version without them is the version that causes a problem later.

Your employer has taken out a policy that may pay part of your earnings if illness or injury stops you working for a long period. It starts after a waiting period, not straight away, and the employer's own sick pay is what covers the time before that.

It is not automatic. The insurer decides each claim against the terms of the policy and the medical evidence, so nobody can tell you in advance that you would definitely be paid. What is paid is a proportion of earnings as the policy defines them, not your full pay, and it is taxed as income through payroll like your salary.

The cover belongs to the employer, not to you, so it does not move with you if you leave. If you want to know exactly what applies to you, including whether your level of cover needed any medical questions, ask your employer for the scheme booklet.

Neutral questions. None of them implies a right answer, and the answers are what let you compare like with like.

• Which definition of incapacity does this policy use, and what would that mean for someone in our most common role?
• What is the deferred period, and does it line up with how long we actually pay sick pay?
• What is the free cover limit, how many of our people are above it, and what happens to those people?
• Is the payment period limited, and if so what happens at the end of it?
• Is benefit offset against state benefits or other income, and how?
• What rehabilitation or early-intervention support is included, when can we use it, and does using it require a claim to have been made?
• What are the actively-at-work conditions, and do they bite on new joiners or if we change insurer?
• If we move the scheme, what happens to anyone currently absent or claiming?
• What has changed in the terms since last year, not just in the price?

Income protection is among the hardest benefits to communicate, for a reason worth naming: it is insurance against something nobody wants to imagine, it pays nothing to most people in most years, and the honest description of it contains several qualifications. That combination makes it easy to skip and easy to oversell.

Three things tend to help. Say what it does in one sentence and put the waiting period in that sentence, because the gap between absence starting and payment starting is where expectations break. Explain the free cover limit to the people it affects rather than to everybody. And mention the rehabilitation support separately from the claim, since it is the part people may use without ever making one.

Then tell people where the scheme booklet lives. Most of the questions you will get are answered in it, and the answer to a question about cover should point at the document rather than at a recollection. The general problem, and what to do about it, is in why employees do not use their benefits.

Income protection sits next to other arrangements that cover different things, and the overlaps are worth mapping before you buy. An employee assistance programme is sometimes bundled with a policy like this, and covers a different need entirely. Private medical insurance pays for treatment rather than income, which is a different question from what happens to someone's wages.

If long absence is the thing you are actually thinking about, the practical end of it is in return to work plans, and the national picture on how much time is lost and why is in UK sickness absence rates.