Unapproved group life cover is the everyday name for what HMRC and insurers call an excepted group life policy. It is death in service cover that an employer pays for outside the registered pension scheme rules, and its main attraction is that the lump sums it pays sit outside the lump sum and death benefit allowance that applies to registered schemes.

Weighing the two routes for your staff? An FCA-authorised broker phones back free and sets out how each would sit with your scheme after an employer fills the form on this page in.

Why is it called excepted, and is it really unapproved?

"Excepted" comes from tax law. HMRC explains that a group life policy which only provides death benefits can be taken out of the chargeable event rules for life policies, provided it meets certain other conditions. A policy that fails those conditions is back inside the rules "even if it provides death cover only", and gains can arise on the second and later deaths insured under it.

The word "unapproved" is a little misleading, because nobody approves these policies at all. HMRC says there is no formal approval process, so insurers, policyholders and their advisers have to satisfy themselves about a policy's status, and the tests apply continuously rather than only when the policy starts. A policy can lose its excepted status later if it stops meeting a condition.

The other half of the comparison is the registered scheme. Unum says the definition of a registered occupational pension scheme includes arrangements set up to provide benefits only on death in service. HMRC's inheritance tax manual says an excepted policy "is not a registered pension scheme or an employer-financed retirement benefits scheme".

How do registered and excepted group life schemes compare?

PointRegistered schemeExcepted group life policy
Status with HMRCRegistered with HMRC; Legal & General says the registered scheme tax reliefs are not available if the scheme is not registeredNot a registered pension scheme; no approval process
Benefit levelsUnum says people insured can have different levels of benefitUnum says everyone insured must have the same level; HMRC requires one calculation method for all
Lump sum and death benefit allowanceA payout is set against the allowance of the member who died (Legal & General)Payments are outside the allowance (Legal & General)
Income tax on the lump sumCan be tax-free up to the allowance in certain circumstances; income tax on the excess (GOV.UK)Paid free of income tax where the policy pays under a discretionary trust (Legal & General)
Who decides who is paidTrustees of the schemeTrustees, who have discretion as to who receives the lump sum and in what proportion (HMRC)

An employer does not have to choose only one. Legal & General describes cover divided into separate policies, with part of the benefits paid through a registered scheme and the remainder through excepted policies. Which insurers offer both routes is covered on group life insurance providers in the UK, and the basics of how any employer scheme pays out are on group life assurance cover.

Why do employers use excepted cover for high earners?

The reason is the allowance. GOV.UK gives it as up to £1,073,100, more for someone who holds a protected allowance, and it covers certain lump sum death benefits as well as some lump sums taken in life. Whatever goes over it is charged to income tax. A registered group life payout is one of the lump sums that uses it up, according to Legal & General, and so do most tax-free lump sums the person drew from a registered pension scheme earlier, which leaves less room for the death benefit.

With a high salary and a generous multiple, the payout from a registered scheme can therefore run into an allowance that is already partly spent. Unum describes excepted cover as tax-free and "sometimes used for high earners", because it allows lump sum benefits to be paid outside the allowance.

HMRC's rules also fit the way insurers cap very large claims. A limit on the payout is allowed in an excepted policy if it is the same for any death, and HMRC's own example of why an insurer might want one is the death of a very highly paid individual, such as the managing director, who is covered under the policy.

The trade-off is flexibility. HMRC's example of what fails is a policy giving one group a different salary multiple from another, and Legal & General says it sets up a separate policy for each benefit formula. A richer benefit for directors therefore usually means its own policy. How much allowance a given director has left is a question for a tax adviser. Whether directors warrant a policy of their own at your firm is worth raising with that broker, who rings when your form on this page reaches them.

What conditions must an excepted policy meet?

HMRC's Insurance Policyholder Taxation Manual sets out the conditions, which come from the Income Tax (Trading and Other Income) Act 2005. The main ones, in summary:

  • The policy must name an age over which no death benefit is paid, and that age must not exceed 75. It need not be the same for everyone, for example where it follows each person's retirement age.
  • The method of calculating the benefit must be the same for everyone insured. A multiple of salary is fine if the multiple is identical for all.
  • A cap on the payout is allowed if it applies equally to any death.
  • Only death benefits, or refunds of premiums for unexpired periods, can be paid, and there can be no surrender value other than a share of unused premiums if the policy is cancelled.
  • The people who receive the money must be individuals or charities. A policy under which the company itself is the beneficiary would not meet the condition.

Who receives the money, and why is there a trust?

HMRC describes the usual set-up as a trust in which the employer is the settlor. Nothing is payable to employees themselves: the lump sum goes to relatives or dependants only where the death happens during employment and before retirement age, and the trustees choose who gets it. Because of that discretion, HMRC says the death benefits are not treated as within the member's estate.

The trust falls under the relevant property rules for inheritance tax. HMRC notes that because the policy is term assurance, its value when placed in trust is usually very small; the case it singles out is someone insured being terminally ill when the policy is taken out. The full tax picture for both routes is on is group life insurance taxable, and a wider look at how employers arrange this cover is on death in service insurance for employers.

Which kind of scheme your own employer has is shown in the scheme documents, and the HR or benefits team can confirm it.

Frequently asked questions

Can an excepted policy pay a pension to a partner?

Not directly. HMRC says a policy that pays such a pension direct would not meet the conditions, because the benefit would be income rather than a capital sum. A lump sum representing the capitalised value of a pension can be paid.

Is a policy for one director the same thing?

No, a policy on a single named person is a separate product, with its own cost and providers set out on relevant life insurance providers. Excepted group life cover insures a defined group on one benefit formula.

Who checks that a policy qualifies?

HMRC says insurers, policyholders and their advisers have to do it themselves. Which of the two routes could suit an employer is something a broker will go through, without charge, if the form on this page has been filled in. More employer-paid protection is listed in the business and workplace cover guide.

Sources