Life insurance for employees: a guide for UK employers
Group life, death in service, excepted schemes and relevant life cover explained, with costs, tax and how to choose the right option for your workforce.
Offering life insurance for employees is one of the most valued and cost-effective employee benefits a business can provide. If a member of your team dies while employed, the policy pays a tax-efficient lump sum to their family at the moment they need it most. This guide explains the options UK employers have, from group life insurance and death in service to excepted schemes and relevant life cover, what each costs, how tax works and how to choose the right one for your workforce. We are a family-run protection broker, and we help small and medium-sized businesses set up and review employee life cover.
What is life insurance for employees?
Life insurance for employees is life cover that an employer arranges and pays for on behalf of its staff. When an insured employee dies, the insurer pays a lump sum, usually a multiple of the employee's annual salary, to their chosen beneficiary or family. Most employers offer it through a group life scheme, often called death in service or group life assurance, which covers many employees under a single policy. Smaller firms and company directors sometimes use individual relevant life policies instead.
Unlike personal life insurance, which an individual buys for themselves, employee life cover is paid for by the business, sits within the employee benefit package and usually needs no medical questions for most staff. It is a straightforward way to provide meaningful financial security for families without cost to the employee.
Why do employers offer life insurance to employees?
Employers offer life cover for three main reasons. First, it helps attract and retain good people. In a competitive jobs market, a strong benefits package makes a real difference, and death in service is one of the benefits employees value most once they understand it. Second, it shows the business cares about employee wellbeing and the people behind the workforce, which builds loyalty and satisfaction. Third, it is cost-effective. Because risk is spread across the whole group scheme, premiums per person are usually low, and the payout is far larger than the annual cost.
There is also a practical side. Without cover, a business may feel pressure to make an ex gratia payment to a bereaved family. A group life policy handles that properly, quickly and through a trust.
What are the types of life insurance for employees?
There are three main ways to integrate life insurance into your benefits:
Registered group life scheme
The most common option. One policy covers all eligible employees. It is registered with HMRC and benefits are paid through a discretionary trust.
Excepted group life scheme
A group policy not registered with HMRC, often used for higher earners whose death benefits could be affected by the limits on registered schemes.
Relevant life cover
An individual life policy the employer buys for one employee or director. Popular with small firms and company directors.
Many businesses use a combination: a group life scheme for the wider workforce and relevant life policies or an excepted scheme for directors and senior staff.
How does group life insurance work?
With group life insurance, the employer takes out one policy covering all eligible employees, and the level of cover is usually set as a multiple of each person's salary, commonly between two and four times annual salary. New starters are added automatically once they meet the eligibility rules, and leavers drop off. Premiums are recalculated each year, typically at the annual review, based on the salary roll and the ages of the people covered.
Most employees are covered without medical underwriting, up to a free cover limit set by the insurer. Only those whose benefit is above that threshold may be asked health questions. That makes group life very simple to run through payroll and HR.
Employees normally complete an expression of wish, or nomination form, telling the trustees who they would like the benefit paid to. The trustees then decide who receives the payout, taking the employee's wishes into account. Because the benefit is paid through a trust, it normally sits outside the employee's personal estate for inheritance tax purposes and can be paid quickly, without waiting for probate.
How much does life insurance for employees cost?
The cost depends on how many employees you cover, their ages and salaries, the multiple of salary you choose, your industry, and whether you add extras such as dependants' pensions. As a very broad guide, group life premiums for a typical SME workforce often work out at a small percentage of the total salary roll each year, and the premium per employee is usually far lower than individual cover would cost. Relevant life premiums are based on the individual's age, health and cover. We will give you a precise quote for your business.
Because the premium is reviewed each year, it is worth checking the scheme at renewal. Most employers stay with the same insurer for years without anyone shopping the market, and that is where savings are often missed.
Already have a scheme?
We will review it against the market before your next renewal.
Is life insurance for employees a taxable benefit?
For most schemes, no. Premiums paid by the employer to a registered group life scheme are not normally treated as a taxable benefit for the employee, and are usually an allowable business expense for the employer. The same generally applies to relevant life cover, which is one of the reasons it is popular with company directors. The lump sum payout is normally paid free of income tax and, because it is paid through a trust, usually outside the estate for inheritance tax.
There are limits. Death benefits from a registered scheme can count towards the lump sum and death benefit allowance for people who die before age 75, which is why higher earners may be better suited to an excepted scheme. Tax rules can change and depend on individual circumstances, so we always recommend checking the position with your accountant.
What is relevant life cover and who is it for?
Relevant life cover is an individual term life insurance policy that the company takes out on one employee or director and pays for as a business expense. The benefit is paid through a trust to the person's family. It is a good fit for:
- Small businesses with only a handful of employees, where a group scheme is not practical
- Company directors who want life cover paid by the business rather than personally
- Senior employees who need a higher level of cover than the group scheme provides
Relevant life policies must be term policies with no cash value, and they cannot be used to provide cover for the business itself. For that, key person insurance is the right product.
Who is eligible for employee life cover?
You set the eligibility rules for your group scheme. Typical conditions include being a permanent employee, being under a set age, and having passed a probationary period, although many employers cover staff from day one. You can cover all employees at the same multiple of salary or offer different levels to different categories, such as directors and management. It is important that eligibility is clear and applied consistently, and that it is documented in the scheme rules.
What happens when an employee leaves?
Cover under a group life scheme normally ends when the employee leaves. Group cover usually cannot be taken with them, so employees who rely on it should consider whether they need personal life insurance too. Relevant life policies can sometimes be transferred to a new employer if both agree, but otherwise lapse when employment ends.
Group life scheme
One policy for the whole team, automatic cover for most staff, cover set as a multiple of salary, reviewed every year. Best for businesses with a few employees or more.
Relevant life cover
An individual policy per person, paid by the company, with its own underwriting. Best for directors, senior staff and very small firms.
How do you choose the right life cover for your employees?
Start with your workforce demographics, your budget and what you want the benefit to achieve. A strategic review of the options looks at the level of cover, eligibility, whether to include other group risk benefits such as group income protection or group critical illness cover, and how the scheme fits your wider package. Consider privacy too: group schemes need minimal personal information from most staff.
We compare the group life market for you, explain the difference between registered and excepted schemes, set up the trust with the insurer, and review the scheme every year. Using us costs your business nothing extra, because our commission is included in the premium. This page is general guidance only and not tax or legal advice.
Montgomery Financial is a family-run broker based in Northamptonshire, helping employers across Northamptonshire, Bedfordshire and the UK protect their people.
Life insurance for employees: common questions
Do employers have to provide life insurance for employees?
No. There is no legal requirement in the UK to provide life cover for employees. It is a voluntary benefit, although it is one of the most common ones.
How much life cover do employees usually get?
Group schemes commonly pay between two and four times annual salary, but you can choose the multiple that suits your budget.
Is death in service the same as group life insurance?
Yes. Death in service is the name employees usually use for the benefit paid under a group life insurance scheme.
Can a small business offer group life cover?
Yes. Many insurers will set up a group life scheme for a small number of employees. For very small firms, relevant life policies can be a good alternative.
Do employees need a medical to be covered?
Most employees are covered automatically without medical questions, up to the insurer's free cover limit.
This page is general information, not a personal recommendation.
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