What is Group Life Insurance?

Group life insurance – commonly known as death in service benefit – is a policy taken out by an employer that pays a tax-free lump sum to the family or dependants of an employee who dies while employed by the company. It is one of the most valued employee benefits and one of the most cost-effective for the employer.

Unlike individual life insurance, a group policy covers all eligible employees (or a defined group of employees) under a single contract. There is usually no individual medical underwriting for standard cover levels, which means employees with pre-existing health conditions benefit without having to disclose their medical history.

How Group Life Insurance Works

1. The employer takes out a policy with an insurer, covering all eligible employees
2. The employer pays the premiums – there is no cost to the employee
3. If an employee dies during the policy period, the insurer pays a lump sum
4. The lump sum is paid to the employee’s nominated beneficiaries, usually through a trust

The benefit is typically expressed as a multiple of salary:

The most common cover level in the UK is 3 or 4 times annual salary. Some employers offer higher multiples for senior staff.

What is Covered?

Standard Cover

• Death from any cause during the policy period (including illness, accident, and natural causes)
• Terminal illness – most policies include an accelerated payment if the employee is diagnosed with a terminal illness (typically life expectancy of 12 months or less)

Optional Extensions

What is Not Covered

• Death after leaving employment – cover ceases when the employee leaves
• Suicide within the first year – some policies exclude suicide in the initial policy period
• Deaths excluded by specific policy terms – war, terrorism or activities excluded in the policy wording (varies by insurer)

Cost to the Employer

Group life insurance is remarkably affordable because the risk is spread across the entire workforce:

For a typical UK office-based workforce with an average age of 35-40, expect to pay around 0.2% to 0.5% of the total salary bill. A company with a £500,000 annual payroll might pay £1,000 to £2,500 per year for 4x salary cover.

This makes group life insurance one of the most cost-effective benefits an employer can offer.

Tax Treatment

For the Employer

• Premiums are an allowable business expense for Corporation Tax purposes
• The premium is deducted from profits in the year it is paid
• There is no National Insurance liability on the premiums

For the Employee

• The premium paid by the employer is not a taxable benefit in kind provided the policy is set up under a registered group life scheme
• The benefit does not need to be reported on a P11D
• The lump sum paid on death is free of income tax when paid through a discretionary trust

The Importance of the Trust

Group life benefits should be paid through a discretionary trust (also called an excepted group life policy trust). The trust arrangement ensures:

• The lump sum is outside the deceased’s estate for inheritance tax purposes
• No inheritance tax is payable on the benefit (within the lifetime allowance)
• The trustees (usually the employer) have discretion to pay the benefit to the most appropriate person, even if the employee’s nomination form is out of date

Without a trust, the lump sum forms part of the employee’s estate and could be subject to 40% inheritance tax above the nil rate band (currently £325,000).

Lifetime Allowance Changes

Since April 2024, the pension lifetime allowance has been abolished. However, lump sum death benefits (including group life payouts) are now subject to the new lump sum and death benefit allowance of £1,073,100. Benefits above this amount may be subject to income tax in the hands of the recipient. For most employees, this threshold is unlikely to be breached, but it is relevant for highly paid staff with large cover multiples.

Setting Up Group Life Insurance

Eligibility

Employers typically define eligibility by category:

HMRC requires that the scheme is available to all employees in a defined category – it cannot be offered on an individual pick-and-choose basis.

Minimum Group Size

Most insurers require a minimum of 3 to 5 employees for a group policy. Below this threshold, key person insurance may be more appropriate.

Medical Underwriting

For standard cover (typically up to 3 or 4 times salary up to a specified free cover limit), no individual medical underwriting is required. The insurer sets a free cover limit based on the group size and demographics – cover amounts above this limit require individual evidence of health.

Group Life Insurance vs Individual Life Insurance

Employees should be made aware that group life cover ceases when they leave. Those relying solely on death in service benefit should consider personal life insurance alongside it for continuity.

Group Life Insurance and Recruitment

Death in service benefit is consistently ranked as one of the most valued employee benefits in UK workplace surveys. Including it in your benefits package:

• Attracts candidates – it signals that the employer cares about employee welfare
• Aids retention – employees value the financial security it provides their families
• Low cost, high perceived value – the employer spends relatively little for a benefit employees prize highly

When advertising roles, death in service benefit is typically listed alongside the workplace pension , holiday entitlement, and other core benefits.

Accounting Treatment

Profit and Loss Account

The premium is recognised as a staff cost (employee benefit expense) in the profit and loss account in the period to which it relates:

Balance Sheet

If the premium is paid annually in advance and spans two accounting periods, a proportion may be carried forward as a prepayment .

If a Claim is Made

The lump sum is paid directly by the insurer to the trust (and then to the beneficiaries). It does not pass through the employer’s accounts. The employer simply notifies the insurer and provides the necessary documentation.

Related Employee Protection

Group life insurance sits alongside other forms of employee protection:

• Income protection insurance – pays a proportion of salary if an employee is unable to work due to illness or injury
• Private medical insurance – covers private healthcare costs
• Key person insurance – protects the business (not the employee’s family) if a critical individual dies
• Employers’ liability insurance – covers the employer’s legal liability for employee injury or illness at work