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Make income protection work

The board of my firm has decided to increase the benefits package we offer to senior employees and feel some form of sickness insurance would be most useful, both to the company and to the employees themselves. How do you suggest we should proceed? We are a firm of accountants and the scheme would initially be offered to 20 members of staff.

Obviously, I would need a great deal of further information to advise you properly but, based on the above, my initial recommendations would be the following.

The most suitable insurance product for your need is probably permanent health insurance, also known as income protection. Traditionally, income protection enables the employer to pay a sick employee for as long as they are unable to work after a predetermined deferment period.

The reason why employers choose income protection is normally to offset the cost of paying a long-term absentee. However, many businesses do not know how much it actually costs them each year to do this. Including all the associated costs, it can actually be up to 16 per cent of payroll. If an employer does not have the correct monitoring procedures in place, insuring only the cost of the income does not provide the solution to the problem of losing a key employee through long-term sickness.

Income protection cannot necessarily provide the whole solution but there is more to group income protection benefits than the amount of money paid out in the event of claim.

When choosing a provider of income protection, I recommend that you consider the service provided when an employee becomes sick alongside the level of cash benefits and the premium.

The reason for this is simple. As an employer, you wish to insure your key employees so that they, and you, have the peace of mind that, if the worst were to happen, they would be financially secure. However, the business also needs to get employees back to work as quickly as possible. If your income protection policy provider does not provide a means to rehabilitate sick employees, where possible, then the long-term problem faced by the business is not being fully addressed by your policy.

There are a number of insurers offering group income protection schemes but most of them are basically individual policies grouped together, rather than a product designed as a benefit for employees and their employers. The best group policies tend to be produced by one of the established players in the market that has had time to develop specific commercial policies with a dedicated rehabilitation programme to offer to clients.

After choosing an insurer that you are happy with, the policy can then be set up according to your company&#39s needs. I would recommend that you have as short a deferment period as possible but you would have to bear in mind that a short deferment period has a higher cost.

The reason for a short deferment period is to allow the insurer to assess whether your employee will be able to return to work. If this is possible, the insurer can establish what help is needed for them to be able to return to work. A deferment period of less than 90 days would be ideal while six months is the maximum for rehabilitation to have any chance of success.

The level of cash benefit paid during a claim is normally 75 per cent of salary and is paid to the employer gross. The employee receives the income from you net of tax.

The minimum number of members for a group scheme is usually five. Assuming some natural wastage will occur, you are comfortably within that limit. Also, having already identified who you want to be in the scheme, it seems you have already addressed the criteria for membership.

The premium for income protection is usually around 2 per cent of a firm&#39s payroll. So you can estimate the savings you would make by comparing this with your own estimate for how much your current level of absence costs.

Out of the big three group providers, Unum, Royal & Sun Alliance and Swiss Life, I would currently lean towards the Unum group income protection plan because it is competitively priced and the company has a large team of trained medical and rehabilitation staff.

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