What it means
When an employee falls seriously ill, normal sick pay usually runs out after a short period. Group income protection steps in after that, paying a regular amount that replaces a share of earnings, typically somewhere between half and three quarters of salary.
The employer buys one policy covering many employees, which is usually cheaper and simpler than individuals buying their own, and cover is often granted without individual medical questions up to a set limit. Two terms shape the cost and the value of a policy.
The deferred period is the wait before benefits begin, commonly several months, and the benefit period is how long payments can continue. A longer wait lowers the premium, because the employer's sick pay covers the early weeks, while a longer benefit period raises it.
The premium is normally a percentage of the covered payroll. Insurers set the rate according to the age and occupations of the workforce, the length of the deferred period and the claims history of the group.
Because the premium is a predictable regular cost, it is simple to put into a budget. The commercial case is retention and risk.
Employers use the cover to attract staff, to protect them in a crisis and to avoid paying long-term sickness absence out of company cash. Many insurers also provide rehabilitation and return-to-work support, which can shorten claims and help employees recover.
Tax and legal treatment varies by country and changes over time, so employers should take local advice. Policies also exclude certain conditions or limit payments, so it is vital to read what is and is not covered, including any offset for state benefits.
A final consideration is how the cover fits with other benefits. Employers often pair it with group life insurance and private medical cover, and the combined package is easier to explain to staff than separate policies.
Finance teams should also check how claims affect future premiums, because a poor claims record can lead to higher renewal rates.
In practice
Real-world examples.
Example
A software company with 80 employees adds group income protection as part of its benefits package. The finance director budgets $14,000 a year for the premium and treats it as part of the cost of employing staff.
Example
A manufacturing firm's machine operator develops a long-term back condition and is unable to work. After the waiting period the policy pays 75% of his salary, and the insurer funds a physiotherapy programme to help him return.
Example
A professional services firm compares quotes with a 13-week and a 26-week deferred period. It chooses the 26-week option, since its sick pay scheme covers the first half-year and the lower premium saves about $3,000 a year.
Formula
Calculation
Monthly benefit = (Annual salary x Replacement percentage) / 12 - Offsets
Annual premium = Covered payroll x Premium rate
An employee earns $72,000 a year and the policy replaces 75% of salary. The annual benefit is $72,000 x 0.75 = $54,000, and dividing by 12 gives $4,500 a month. If $500 a month of other benefits is deducted as an offset, the payment is $4,500 - $500 = $4,000 a month. For the employer, a covered payroll of $2,000,000 at a premium rate of 0.5% costs $2,000,000 x 0.005 = $10,000 a year.Case study
Seen in the real world.
Fernhill Engineering is an illustrative, fictional company with 150 staff. Before it had cover, one senior designer was off for 14 months with a serious illness, and the company paid him in full for the first six months at a cost of about $38,000.
The finance director realised how exposed the company was to an event like this, and obtained quotes for group income protection. A 26-week deferred period aligned with the sick pay policy, and the premium was set at 0.4% of a covered payroll of $9,000,000, which is $36,000 a year.
The board approved the cover, and in the following years the insurer paid two long-term claims. The illustrative lesson is that a predictable premium can replace an unpredictable and sometimes heavy cost.
Watch out
Common mistakes.
- Confusing group income protection with critical illness cover, when income protection pays a regular income while critical illness cover pays a single lump sum.
- Choosing the shortest waiting period without checking the premium, when a longer period that matches the sick pay policy can save money.
- Assuming every condition is covered, when policies commonly exclude or limit certain conditions, so the terms need reading carefully.
Questions
People also ask.
Does GIP always mean Group Income Protection?
No, the acronym is also used for other terms in finance and investment, so the surrounding context decides which one is meant.
Who pays the premium?
In a typical group scheme the employer pays, although some schemes allow employees to contribute or to top up their cover.
How long do payments last?
Payments continue until the employee returns to work, retires, dies or reaches the end of the benefit period, whichever happens first.
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