Income protection (IP) and death in service benefits are related but one has a much greater take-up than the other. If a member of staff is three times more likely to be off work for six months than to die before they retire, then surely it’s time to overhaul benefits in the area.
Many employers provide a death in service benefit, or life assurance, which pays out a sum of money, commonly three or four times salary, if an individual dies while employed by them.
Group life assurance schemes offer significant savings against individual policies, and are eligible for tax relief for the employer. Underwriting and paperwork are simple and uncomplicated in most cases, and group policies often come with a high limit of free cover which will require no medical underwriting. In the Unum Employee Benefits Survey, life assurance was considered the benefit second most valued by employees, with 32% of HR staff placing it in the top three. Some 68% of respondents said they offered it as a core benefit to all staff.
"In the UK there are 40,000 employers that offer life assurance as a core benefit,' says Mercer partner John Matthews. "Most of our covered employees see it as a valuable benefit and will opt for it from a raft of flexible benefits, as it promises to alleviate financial hardship for families in the worst possible situation."
However, individuals in the UK are now more likely to suffer an illness or injury that makes them unable to work for more than a year, than they are to die during their working life. One in five men and one in six women suffers a critical illness before their normal retirement age. Some 46% of women and 35% of men who develop cancer survive at least five years. And 78% of heart attack sufferers survive, and yet only 20% of employers offer any sort of income protection (IP), which would provide an income during a long-term sickness absence from work.
Recent research commissioned by Unum found that 38% of employers cite a lack of demand from staff as a major barrier to offering IP. Linda Smith, HR director at Unum explains why: "Many employers don’t offer IP because staff simply aren’t asking for it. But the underlying problem is not that staff don’t value IP – in fact our research shows that as the recession bites, staff increasingly value benefits that offer financial protection. Rather, employees typically have little idea what IP is or how it can provide a back-up plan in the event of long-term illness or injury."
It’s not just staff; employers themselves are often confused. One in ten finance directors who sign off benefits budgets admit they don’t know what IP is and almost 40% wrongly believe that it pays out if employees are made redundant. "Many also think IP is too expensive to set up or maintain, especially when more than half will be cutting or freezing their benefits spend this year," adds Smith, "Yet IP can absorb many of the costs of long-term sickness absence which costs the average UK business £620,000 each year."
Employers underestimate the risk of long-term sick leave and the impact it can have on their business, adds Smith. "Only one in ten people has IP, compared with six in ten who have life assurance, yet people are three times more likely to go on long-term sick leave than to die during their working life."
In the past, life assurance was attached to company pension schemes, so employees have come to expect it as a core benefit. This makes it difficult for HR directors to now take it away, particularly when staff are looking at the added value of their company benefits package.
"But it is possible for employers to rebalance their benefits to offer both. Historically, UK employers have tended to over-insure on life cover, with most offering four times salary to reach the level where tax relief was offered to employers. This changed years ago, but the benefit has stayed at the same level. By changing their offering accordingly, HR directors can retain a reasonable level of life cover while including IP support as well.
Smith makes a strong business case for IP: "Long-term sickness absence costs the average UK business £620,000 every year, but IP absorbs many of the expenses and gives greater cost certainty,” she says. “For every £100 an employer spends on a group income protection (GIP) policy, they get an average £48 payback in savings by not having to pay occupational sick pay – the insurer, rather than the employer, pays the absent employee a monthly income – and through other indirect cost savings."
"Employers see life assurance and GIP very much as either or, but they do very different things," agrees Katharine Moxham, spokesperson for group risk industry body GRiD. "Both are valuable to employees but GIP of more value to employers because it helps with the management and costs of long-term absence, and gets employees back to work as soon as they are ready.
Moxham says that reducing life spend to help fund a foundation level of cover for essential financial commitments would rebalance those benefits to meet today’s needs. "Life assurance is seen to be cheaper than income protection: £100 per employee per year, against £300. But GIP doesn't have to pay out for ever, and you don't have to offer 75% of someone's salary. There are ways of reducing your premiums and still offering a valuable benefit without having it gold-plated."
Employers often think that rebalancing benefits will be unpopular with staff, but Smith believes that this is because HR departments do not communicate effectively with employees to see what they actually want from their package. "With the exception of pensions over a third of HR directors never communicate with staff about core financial employee benefits," she adds. "Employees without dependents do not benefit from life cover and others may have already purchased it with their mortgage, but long-term illness can affect anyone at any time."
Communication is key, says Unum account manager Tim Powell. "When you have someone of 28 renting a flat, two times salary life cover would be sufficient. Employers are wary of taking anything away, but if they invested in communicating what benefits do and provided case studies to illustrate different scenarios they may discover that a segment of their workforce would value IP more highly than life assurance."
Caroline Shepherd at Jelf says that offering both benefits on a flex platform enables employees to align their benefits broadly in line with life events: "It's difficult to reduce life assurance provision; the reduction of any benefit is difficult. The key is to address it in the context of your whole benefits provision. Don't look at any benefit in isolation, look at all of it and try and make it fit together in a way that makes sense.”
"Nobody likes change," she continues. "Take time to explain to staff what is happening and why. Maybe drop life assurance to two times salary. Or offer four times life assurance and 50% IP, but offer the option to flex up or down. Flex helps to redistribute benefits in ways that help the individual."
John Matthews says that an employer should sponsor at least 50% of an individual's salary in terms of IP. "Instead of providing four times salary, an employer could provide two times and spend the balance on IP. Two year's salary may not keep a family going for very long; for most it wouldn't pay off the mortgage, but the state won't provide any support for a family affected by long-term illness."
Another option, suggests Carlie Bryan, benefits manager at accountancy firm BDO, is to close off life assurance to new starters. "Death in service doesn't really have a place in a modern benefits offer, it's definitely being phased out among more progressive employers. For example, 40% of our staff are graduates. What are they paying for? In focus groups, younger employees say don't see the point of having a dependents' pension when they have no dependents. We can't remove it completely but we may close it off to new employees joining the pension plan. An option is to offer two times life cover that individuals can up to four times at their own cost on the flex platform."