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Viewpoint: Addressing the protection gap through group and individual cover

How do the types of cover differ and which is better?

The need for cover in the UK remains alive and well. The working population of the UK is underinsured in general, but some groups are particularly underrepresented.

Our research shows almost half of women aged 25-45 are solely responsible for the financial decisions in their household, yet nearly three in five (57%) in this age group do not have any kind of cover [1]. The question remains: how do we address this gap? There are two major insurance markets – group and individual protection – which provide cover for millions in the UK. In order to find the best solution for uninsured individuals, advisers need to understand the key features of both markets and the products they offer.

What is group protection?

Group protection, otherwise known as group insurance, is an employee benefit purchased by companies to provide cover for their workers. The term is usually used as a blanket term for group life insurance, group income protection and group critical illness products. The contracts are between the employer and the insurer, which does diminish the rights of individuals in these policies, though some of this choice is being returned through the growth of flexible or voluntary benefits. There are many other benefits to such an arrangement though, not least that premiums are typically covered entirely by the company.

Group policies can be tax-efficient for employer and employee alike. Premiums are considered a business expense and can be offset against corporation tax. Group life insurance benefits typically do not form part of the employee’s estate and as such are exempt from inheritance tax calculations, while group critical illness pays a tax-free lump sum directly to insured employees. Two significant benefits of group protection stem from the fact cover is applied to a large number of people: economies of scale and accessibility. On the whole, group policies are cheaper per person than their individual counterparts, though this is not necessarily the case for particularly young or healthy adults – but they are not paying the premium anyway.

In terms of accessibility, it is impractical for insurance providers to ask questions of everyone about their medical history. Instead, group policies have a level of benefit which can be provided without the need for any medical questions, which is often called a free cover level or limit, or a non-medical limit. This can open the door to cover for people with health conditions which would make buying insurance for themselves expensive or even impossible.

Group insurance can form the core of a great employee benefits package and there are options which can make it an attractive choice for businesses of any size. They can then be used in efforts to recruit and retain the best available talent – as the benefits are linked to employment, they are lost if an employee leaves the insured company which, depending on their circumstances and the provisions of competitors, may be a significant disincentive to leaving.

What is individual protection?

Individual protection covers insurance policies bought by consumers for themselves. It covers life insurance, income protection and critical illness, which are sometimes combined into hybrid policies. Since the policy is being purchased directly by a person to meet their specific needs, these policies offer much greater control over the terms of the cover. Various decisions will affect the price of the policy, which allows the consumer to tweak the product to meet their individual needs at a price point which is affordable for them.

In order to give consumers a price for their cover reflective of the risk the insurer is taking on, all individual policies ask medical questions up front. This can be a time-consuming and intrusive process, so it has received a lot of attention in recent years to minimise the disruption. For instance, if multiple products are being bought at the same time it may be possible to submit a single set of responses to the medical questionnaire which can then be used to underwrite all the policies at the same time. Sophisticated systems can streamline the process by only asking questions relevant to the cost and giving an indication of what that price will be right there on the application.

One of the biggest challenges for individual protection is encouraging people to buy young. Age is a significant factor in cost, and healthy, younger people can lock in good prices if they apply early in their adult life. Unfortunately, younger adults rarely see the need for health or life insurance products and the major life events which would historically prompt conversations about the need for protection, such as buying a house, getting married or starting a family, are now happening later into adulthood.

Reaching this group with compelling reasons to add insurance to what is probably an already-stretched budget is a key focus area for insurers and advisers if the market is going to see any substantial growth.

Which is better?

The products are essentially the same – life insurance pays out if you die whether it is a group or individual policy, and so forth. The key differences are in the funding, the approach to medical information and the control the consumer has.

For most people, group policies are cheaper because their employer pays for them, and they are less intrusive and more accessible from a medical perspective. However, very few people are in a position to demand a group policy and uptake is low – estimates suggest around 4% of UK businesses have a group life insurance policy in place, far fewer have group income protection and fewer still have group critical illness. For employers, group protection policies are an affordable addition to any employee benefit package and can be an excellent tool for attraction and retention of the best talent in any field. For proactive consumers who are aware of their risks and are keen to mitigate them, it never hurts to have protection which you own, meets your needs and can travel with you from employer to employer if need be.

Steven Dean is research and communication specialist at Canada Life Group Insurance

[1] Women and Protection research, Canada Life Group Insurance, March 2018