Group Life Policy for Registered Schemes Technical Guide

For commercial customers and their advisers only Group Life Policy for Registered Schemes Technical Guide Reference BGR/4507/FEB10-P

Contents Page Its aims 3 Employers your commitment Risk factors How does the policy work? 4 1 What factors should be considered in deciding which benefits to provide? 2 Setting up the policy 7 3 What premiums will be charged for the cover? 8 4 How does the policy accounting work? 9 5 Claiming benefit 10 6 What is not covered? 7 Can cover be provided for an employee who is not in the UK? 8 Taxation of policies 11 9 Continuation option Further information Questions and complaints Financial Services Compensation Scheme Law Legislative changes 2

This technical guide has been produced based on the best practice standard format recommended by the Group Risk Insurance Development Group (GRID) and the Association of British Insurers (ABI). This technical guide is intended for use by commercial customers and their advisers. Its aims To provide insurance to cover the lump sum benefit payable on the death of a member. To provide insurance to cover an additional lump sum benefit payable on the death of a member which can be used by the trustees to purchase dependants pension benefits or to pass on to the dependants as a lump sum if the scheme rules allow. The additional lump sum can be defined in terms of the pension entitlement required or as a multiple of salary as calculated by the trustees (see 1.3 (b) Dependants pensions). To offer a flexible range of choices for these benefits. To provide benefits within the regulations for registered group life schemes in order to take advantage of the preferential tax treatment for these arrangements. As this insurance is provided for a registered group life scheme it should be taken out under a registered trust scheme. In this guide any reference to an employer is also intended to refer to the trustees of a registered group life scheme written on behalf of the employer. Employers your commitment To pay us premiums as they become due. To provide all the information we require when you apply for cover, at each annual revision date and premium review date or in support of a claim, and to notify us if these details change. To provide postcode information giving the principal place of employment for all employees. To notify us if there is any change in the postcode information for more than 5 percent of the members, or for members whose benefits equate to more than 5 percent of the total sum insured (or 10,000,000 if lower). To agree at outset the eligibility conditions that govern who can be covered by the policy. To adhere to the eligibility conditions agreed. To identify and notify us in writing of any discretionary entrants. To notify us of potential claims as soon as possible and in any case within one month of the death of any member. To create or maintain a registered scheme under which the policy will be effected. To comply with the terms and conditions of the policy. To notify us of any changes in the companies participating in the policy and the relationship between them. Risk factors Cover will cease if you fail to comply with the terms and conditions or if premiums are not paid when they are due. Cover is designed to provide death in service benefits and has no surrender value. A significant change in the eligibility conditions, your business, the benefit basis and a number of other factors may bring about an adjustment in premiums and terms at any time (see 3.2 Will there be any unexpected extra premiums? ). The rates used to calculate premiums are normally guaranteed for two years and are then reviewed. However, this guarantee will cease to apply in some specified circumstances (see 3.2 Will there be any unexpected extra premiums? ) and if there is a change of 25 percent or more in the number of members or total benefit insured. In certain circumstances we will apply a restriction on the total amount of benefits payable for claims which are directly or indirectly attributable to one originating cause (see 6. What is not covered? ). If such a restriction applies details will be given in the quotation. Cover will not be in place for claims arising directly or indirectly from one originating cause unless full postcode information has been provided and terms agreed. Where there are changes to the postcode information for more than 5 percent of the members, or for members whose benefits equate to more than 5 percent of the total sum insured (or 10,000,000 if lower), cover will not be in place for those members for claims arising directly or indirectly from one originating cause until we have confirmed that such cover can be provided. When two or more members travel together by any means of transport the total sum assured will be restricted to a maximum of 50,000,000. 3

We have the right to change the policy conditions at any time for benefits coming into force in the future and for all benefits at any time after the policy has been in force for two years. Membership of a registered group life scheme may have an impact on enhanced protection. As enhanced protection operates at an individual level members who have registered for this type of protection should seek advice in respect of their particular circumstances. We reserve the right to cancel the policy if the number of members drops below five. Your questions answered How does the policy work? You decide the amount of benefit you require for your employees (but the benefit basis must be the same for all members within a category). You must include all eligible employees in the policy when they first become eligible. You pay all the premiums as they become due to keep the cover in force. The cost is usually treated as a trading expense for tax purposes and is not a benefit in kind where the scheme is a registered group life arrangement. We provide cover whilst the policy is in force no matter how many claims are made (subject to any restriction applied as described in 6 What is not covered? ). You notify us within one month of a member s death. You must provide us with all the information needed to assess and pay a claim. We pay the lump sum benefit to the scheme trustees who will pay this in accordance with the scheme rules, normally using discretionary powers to pay the benefit to the deceased s dependants. If dependant s pensions are to be secured by the policy proceeds by the Trustees they will be taxed as earned income. Under HM Revenue and Customs rules registered group life schemes must be set up under trust. On request, we can provide specimen trust documentation, however, only the scheme administrator can register the scheme. 1 What factors should be considered in deciding which benefits to provide? Trustees usually insure the death in service benefits provided under the registered occupational pension scheme. However, you may choose to insure only part of those benefits with the balance of the members cover being provided from the Pension Fund. It is possible to insure the lump sum and/or dependants pensions (please note that dependants pensions will be insured by way of an additional lump sum). HM Revenue and Customs do not impose a limit on the amount of pension saving that an individual can build up in registered pension schemes but once benefits (from all registered schemes) go above a certain level (the lifetime allowance) there will be a tax charge. The payment of a lump sum death benefit from a registered scheme will be a benefit crystallisation event, which is an event that will trigger a test against the member s available lifetime allowance with any excess giving rise to a tax charge at 55 percent. In this situation the responsibility for testing whether or not there is sufficient lifetime allowance rests with the individual s legal personal representatives Although the test is against the lifetime allowance of the member the liability for any lifetime allowance charge falls upon the recipient and will be accounted for following an assessment by HM Revenue and Customs. Dependants death in service pensions (which would be provided via the additional lump sum) will not count towards the lifetime allowance but will be taxed as earned income in the hands of the recipient. 1.1 Who can be covered? (a) Eligibility The eligibility criteria will be agreed prior to cover commencing and will include: the minimum and maximum entry ages for the employees the expiry age for the cover any service qualifications that may apply 4

which categories of staff are eligible to be included (eg all office staff or all employees) when any new entrants will be able to join the policy (eg immediately they satisfy the eligibility conditions or at the next annual revision date) whether there are any other conditions specified in order to join the scheme (eg pension scheme membership or if the scheme is open to new entrants). Please note that any eligibility criteria connected to age or service need to be considered in light of the Age Regulations. Membership is compulsory for all employees who satisfy the eligibility conditions and meet the actively at work requirements (see 1.1.(b)). Permanent full time and part time employees can be included in the policy. Fixed term contract workers can be covered for the period of their fixed term contract. If pension scheme membership is a condition of joining the group life scheme we need to know the eligibility conditions for joining the pension scheme. If an employee does not join the pension scheme at the first opportunity evidence of good health will be required before we can provide cover under the policy. However, for employees joining the pension scheme within six months of their first opportunity cover can be provided subject to the employee meeting an actively at work requirement. (b) Actively at work This is the criterion that the member must meet, in addition to the other eligibility conditions, before they are covered under the policy. An employee is considered to be actively at work if they are present at their place of work and are mentally and physically capable of performing the normal duties required by the job for which they are employed. Confirmation that any actively at work requirement has been met must be provided by the employer in writing. Long term absentees In all cases, regardless of whether or not the actively at work requirement has been waived we will need full details of long term absentees (ie those who have been absent from work for three months or more) at the time of quoting and at the on risk date. The details required are date of birth, gender, date first absent, reason for absence and sum assured. Friends Life are not on risk for any long term absentees until full details have been provided and we have specifically confirmed that cover is in place for each long term absentee. New policies If a policy has not been previously insured employees will usually only be covered if they are actively at work on the day they first become eligible to join the policy. If they are not actively at work on the relevant date they will only be covered once they have been actively at work for the time specified in the quotation. Existing policies When cover is moved to us from another insurer the actively at work requirement is usually waived for existing members for the level of benefit covered by the previous insurer, but long term absentee requirements must still be met (see above). New entrants and increases in benefits for existing members will usually be covered once the member is actively at work. 1.2 When will cover cease? 1.2.1 Under normal circumstances Cover ceases on the earlier of: a member reaching the scheme expiry age a member leaving service a member no longer satisfying the eligibility criteria. Cover will also end when the policy ends. The policy will end when: you fail to pay any premiums due the number of members is reduced below the minimum number we agree you fail to comply with any reasonable request for information there is a material change in your business you or any employee covered fail in your duty of utmost good faith towards us you end the policy. We will pay any valid claims after the policy ends if they arose during the period of cover. 5

1.2.2 Cancelling the cover You can end the policy at any time provided that: notification is given in writing; and we are given at least 30 days notice. Cover will then cease and you will not be liable for premiums for any period after that date. Please note that cancellation cannot be backdated. 1.3 What types of cover are available? The following types of benefit are available: (a) Lump sum benefit The lump sum benefit selected can either be a fixed amount or more often, a multiple of salary and can vary for different categories of employees (but the benefit basis must be the same for all members within a category). (b) Dependants pensions An additional lump sum benefit can be insured which can be used by the trustees to purchase a pension in the event of the death of a member. Alternatively, if the scheme rules allow, the benefit can be paid by the trustees as a lump sum to the dependants. The pension can be provided for a member s spouse/civil partner, children or other dependants. The additional lump sum can be a fixed amount, a multiple of salary or calculated by converting the pension to a lump sum at the outset of the policy using agreed capitalisation factors which would be written into the policy and reviewed every two years. Alternatively, the additional lump sum can be defined in terms of the pension entitlement required. In these cases the lump sum is guaranteed to be enough to purchase a specific annuity at the member s death. The lump sum payable to the trustees would be the purchase price of the annuity required by the most competitive provider in the market with a financial rating above a certain level. The financial rating to apply will be agreed at the inception of the policy. Pensions are reduced when a dependant (other than a child) is more than 10 years younger than the deceased member. 1.4 When are pension payments due? This will depend on the annuity purchased but pension benefits are usually paid monthly in advance following the member s death. 1.5 For how long will dependant pension benefits be paid? The pension scheme rules will usually state who is entitled to a dependant s pension and for how long it will be paid. However, pension benefits for spouses/civil partners and other adult dependants will normally continue throughout their lifetime. For children the pension benefit is usually payable until the youngest child has reached age 18 or possibly to age 23 if in full time education. 1.6 Can benefits in payment be inflation protected? Yes. If escalation is required this should be taken into account when determining the lump sum to be insured. The most common increases are: by a fixed percent per year compound up to a maximum of five percent per annum in line with the Limited Price Index. Increases take effect on the anniversary of the day benefits commenced. 1.7 Are there any special coverages possible under the policy? Where a member is off work due to sickness or injury, the cover can continue until the policy expiry age providing the premiums are paid. For absence due to any other reason the cover can be maintained for up to three years. Cover will normally be at the level in force on the day before absence begins. If a member retires early through ill health, cover for lump sum benefits can usually continue until the relevant expiry age. This option must be selected at policy level and will result in an additional charge. Please note that this option does not apply to any additional lump sum covered to purchase dependants pensions. It should be noted that where a pension is insured as a lump sum equivalent, escalation should be taken into account in determining the multiples to be used. 6

For an additional premium it may be possible to continue cover for lump sum benefits for members who are made redundant. Cover is normally provided until the end of the notice period but can continue for up to two years. Cover will cease on the earlier of: the date the member is re-employed and entitled to benefits under a registered scheme the date the member becomes self-employed the member reaching the policy expiry age the end of the specified period. In all of the above, you must continue to pay premiums during the period of cover. 2 Setting up the policy 2.1 Requirements to set up the policy We prepare a quotation based on the specification supplied by your intermediary. The specification will include benefit options, membership data (including age, gender, salary, occupation and location details), claims history for the last five years, if previously insured and underwriting decisions for members who have been underwritten under any previous policy. In order for us to assume risk the policy must start within three months of the quotation and we must have received satisfactory responses (in writing) to all caveats and specific requirements set out in the quotation. Cover will only be effective once we have confirmed in writing that we will assume risk (cover cannot be backdated). Schemes must be registered with HM Revenue and Customs before we can assume risk. To provide cover we require: a signed and fully completed application form current details of employees to be covered including postcode information for the principal place of employment for each employee details of employees with benefits in excess of the free cover level details of employees with benefits in excess of our reinsurance limit details of employees not actively at work at the commencement date a deposit premium policy history, including number of members and total benefit if previously insured (including details of any underwriting decisions for members underwritten under the previous policy) full and up to date claims history for the last five years or such shorter time as the policy has been in force if previously insured pension scheme tax reference. If any of the above have not been received within 30 days of the commencement date then cover will cease immediately. A premium will be charged for the period on risk. (Please note that cover for long term absentees will not be in place until full details have been provided and we have confirmed that we are on risk). 2.2 Evidence of health to be provided before members are covered Since a group scheme is designed to cover all the employees who satisfy the eligibility conditions, we normally only require medical or pastime information for those employees whose benefit exceeds the free cover level. The free cover level is usually based on the number of members and benefits provided under the policy. There must be at least 10 members in the policy for a free cover level to be available. The free cover level only applies to those employees who join the policy when they first become eligible and satisfy the actively at work requirement applicable to the scheme. To calculate whether or not the benefit exceeds the free cover level the lump sum benefit under the policy (including any additional lump sums) is added to the capitalised pension benefit. The insured pension benefit is multiplied by a factor to calculate the capitalised pension benefit. If an employee s cover exceeds the free cover level they will be asked to complete an employee s health declaration. We may then apply to their own doctor for a report and in some instances request a medical examination, other medical tests and/or pastime information. The underwriting process may result in additional premiums or exclusions being applied to cover in excess of the free cover level for some members. In some cases we may be unable to provide cover in excess of the free cover level or previously insured benefit, if higher. 7

For members who have been underwritten and accepted for cover we may be able to accept future increases in benefit without further medical underwriting. In addition, benefits for discretionary entrants (ie those who are joining outside the normal eligibility conditions (including early and late entrants)) will be subject to evidence of good health and cover will be at our discretion. Initially these employees will be asked to complete an employee s health declaration but further medical evidence may be required before cover can commence. 2.3 What happens if a claim arises before a decision has been made? Employees who are entitled to benefits above the free cover level have up to 90 days to complete the underwriting process after the date they are first covered. During this time we will insure each employee for their full benefit up to a maximum limit of 3 million (as long as the cover has not previously been declined by us or another insurer), but any benefit in excess of the free cover level or previously insured benefit will be subject to a pre-existing conditions exclusion. Claims will be subject to any other underwriting restriction we may specify. 3 What premiums will be charged for the cover? The premium calculated depends on factors which include the nature and amount of the benefits to be provided and details of the employees to be insured. The information used to calculate the premiums includes: level of benefits eligibility and entry conditions ages and genders of the employees occupation of the employees location of the workforce claims history if the policy has been previously insured. A minimum premium will be set for each policy and this is currently 500 annually, 300 quarterly, and 100 monthly. Premiums payable more frequently than annually must be paid by direct debit. All premium payments are to be paid in sterling, or other such currency as may be agreed in writing by us. 3.1 How will premiums be calculated? (a) Policies covering between five and 19 people: Single premium costed policies Premiums will be calculated for each employee based on the premium rates current at the beginning of the premium guarantee period. The premium guarantee period is the two year period either from the commencement of a policy or from the last review of premium rates. For this type of policy the premium for each employee is recalculated each policy year based on the applicable premium rate and the employee s age at the start of that year. Premium rates increase with age. If the number of employees increases to 20 or more the policy will be administered and the premium calculated as a unit rate policy, as set out below, from the annual revision date following the increase. (b) Policies covering 20 or more people: Unit rate policies For these policies a premium rate is calculated and expressed as a rate per 1000 of lump sum benefit and per 100 of pension benefit. The rate is calculated using the individual data provided. If the number of employees decreases below 20 the policy will be administered and the premium calculated as a single premium costed policy, as set out above, from the annual revision date following the decrease. 3.2 Will there be any unexpected extra premiums? The unit rate and the rates used in calculating the single premium costed policies are usually set for two years. New rates may be applied at the end of the two year period. The rates and conditions may be varied at any time in the following circumstances: if the number of employees covered is reduced below the agreed minimum if the number of members or the total benefits insured increases or decreases by more than 25 percent from the number at the start of the premium guarantee period if you fail to provide any information reasonably required within 60 days if there is a material change in your business 8

if there is any change in legislation or taxation which affects the cost of cover. Additional premiums may be applied to employees whose benefits exceed the free cover level, or employees who do not satisfy the normal eligibility conditions. The additional premium will reflect that they are suffering from certain medical conditions or partake in hazardous pastimes. You will be notified of any increase in the premiums and the date from when they will be payable. 3.3 What commission is included within the premium? The standard rate of commission for these policies is four percent. The rate of commission will be shown on the quotation. 3.4 Is there a discount for good claims experience? Claims experience is one of the factors used to assess the final premium or unit rate for a policy and therefore good claims history will usually be reflected in the premium charged. 4 How does the policy accounting work? The policy normally operates on a one year accounting period. Premiums are payable on account on an annual, quarterly or monthly basis. At each annual revision date and premium review date we must be provided promptly with all the information necessary to prepare the account. Until we have the most accurate data we will charge approximate premiums. 4.1 What information is required for accounting purposes? (a) Single premium costed policies: A list of all employees in the policy will be required at the start and end of each policy year. The list must show the name, occupation, location of work, gender, date of birth, salary and, if applicable, the date of joining and the date of leaving for each employee. It is also necessary to advise us immediately of the employees whose cover exceeds the free cover level during the policy year. We will also need details of any employees: joining outside the normal eligibility conditions who are in early retirement. (b) Unit rate policies: Details of the total number of employees and the total salary or benefit covered at the start and end of any policy year will be required. It is also necessary to advise us of the employees: whose cover exceeds the free cover level or our reinsurance limit joining outside the normal eligibility conditions who are in early retirement. For both single premium and unit rated schemes additional information will be required when the rates used to calculate the premiums are reviewed, including details of any long term absentees. 4.2 How are accounts adjusted for members who join, leave or have benefit increases during the year? (a) Single premium costed policies: A premium adjustment will be calculated reflecting the amount and duration of the cover actually provided. Any premium adjustment for employees who join, leave or have benefit increases becomes payable at the end of the policy year. (b) Unit rate policies: A premium adjustment will be calculated based on the average total benefit for all employees covered during the previous policy year. Effectively this means salary and staff changes are treated as if they occurred at mid-year. 4.3 If the policy is discontinued mid-year will premiums paid in advance be lost? No. A final account will be produced based on the cover provided up to the date when you cancelled the policy. Either a refund will be paid or any outstanding premiums will be requested. 9

5 Claiming benefit This section deals with common questions which arise following a member s death. 5.1 How are claims made? The evidence required to assess a claim will include, but not be limited to: an original copy of the member s death certificate evidence of the employee being covered and their earnings original copies of a marriage/civil partnership certificate for a spouse/civil partner and birth certificates for the spouse/civil partner plus any other dependants where an additional lump sum benefit is insured to provide pension benefits a signed claim form. Claim forms can be obtained by writing to Friends Life Group Protection Claims Management Team, 2nd Floor, Anchorage 1, Anchorage Quay, Salford Quays M50 3YL Call us on 0845 607 0035 Calls may be recorded and may be monitored. Please note that if the lump sum death benefit (either on its own or in total with other payments under the scheme) is more than 50 percent of the standard lifetime allowance the scheme administrator will be required to report this to HM Revenue and Customs. 5.2 What happens to pensions in payment if the policy is discontinued? The lump sum we have provided to the trustees would have been used to purchase an annuity from an annuity provider. If the policy ceases to be insured by us then the pension benefits would be unaffected. 6 What is not covered? There are no general exclusions under the policy. Exclusions for claims arising from certain specified medical conditions or for specified circumstances may be imposed on benefits that are subject to underwriting. We will apply a restriction on the total amount of benefits payable for claims which are directly or indirectly attributable to one originating cause 1, irrespective of the period of time or area over which the deaths occur. This is commonly known as an event limit. This restriction will apply to the total of the lump sum death benefits and any additional lump sums (including capitalised values) insured to provide for dependant s death in service pension benefits payable under the policy and any associated policies. The event limit will be shown on the quotation and will never be more than 100 million. In some postal locations 2 we will be unable to provide any cover for claims arising directly or indirectly from one originating cause (in such cases the event limit for those postal locations will be zero). 1 An originating cause will include, but not be limited to, a series or sequence of causes which on the balance of probability result from persons acting in concert or in accordance with a plan or design. 2 A postal location comprises any area wherein the postcodes, up to but not including the last two characters are identical. 7 Can cover be provided for an employee who is not in the UK? Individual consideration will be given to covering employees who either work overseas or spend much of their time travelling overseas. In order to be considered employees must satisfy the eligibility conditions of the scheme. In order to grant cover we will need to know the frequency of foreign travel, where the employee will work and the duration of the contract. 10

8 Taxation of policies Premiums Normally policies are financed by an employer with no contribution from employees. In this situation the premiums paid by the employer are allowed as a trading expense and are not treated as a benefit in kind for members. Benefits Lump sum benefits paid from a registered group life scheme will be tax free if the deceased member has sufficient lifetime allowance available. Dependant s death in service pensions do not count towards the deceased member s lifetime allowance and will be treated as earned income in the hands of the recipient. This information is given for guidance only and is based on Friends Life s understanding of current legislation. It is not intended to give definitive advice and employers should seek clarification of the tax position for their specific circumstances. 9 Continuation option A continuation option allowing cover to continue for employees leaving service is not available. Further information Friends Life Group Life Protection is provided under a group life insurance policy by Friends Life Limited, part of the Friends Life group. Questions and complaints We want you to be entirely satisfied with your group life policy. If you have a query or complaint, then in the first instance please contact the financial adviser who arranged the policy. If there was no adviser, please contact us directly. If this does not resolve the matter then please contact: Head of Group Protection, Friends Life Group Protection, 2nd Floor, Anchorage 1, Anchorage Quay, Salford Quays M50 3YL If you meet the eligibility criteria set by the Financial Ombudsman Service you may refer the matter to the Financial Ombudsman Service, as detailed below. If a disagreement continues with regard to a claim the question can be referred to: The Financial Ombudsman Service South Quay Plaza, Marsh Wall, London E14 9SR Telephone 0800 023 4567 or 0300 123 9123. Financial Services Compensation Scheme In the unlikely event that we cannot meet our financial obligations, you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS). This will depend on the type of business and the circumstances of your claim. The FSCS may arrange to transfer the policy to another insurer, provide a new policy or where appropriate, provide compensation. Further information about compensation scheme arrangements is available from FSCS on 020 7892 7300 or at its website http://www.fscs.org.uk/ Law The policy is issued subject to the law of England. Our standard policy provides that employees do not have any rights under the Contracts (Right of Third Parties) Act 1999. This means that there is no requirement to involve employees in day to day decisions on the administration and insurance of the policy. Legislative changes HM Revenue and Customs rules regarding taxation of benefits and premiums may change in the future. This document is a guide to the features of the group life product and should be read in conjunction with the quotation which accompanies it. Full details of the insurance are contained in the policy document. A copy of this document is available on request. Call us on 0845 266 8698 Calls may be recorded and may be monitored. 11

Friends Life provides a range of pensions, investments and insurance products and services. We have a heritage dating back over 200 years and now look after over 5 million customers worldwide. We focus on ways of helping people achieve greater long-term financial security for themselves and their families. We re always looking for new solutions that are more effective, more relevant and more valuable for our customers. We offer a comprehensive range of Group risk products including: - Group critical illness protection - Group income protection - Group life protection For more information, please call 0845 604 0147. Calls may be recorded and may be monitored. Friends Life Limited An incorporated company limited by shares and registered in England and Wales, number 4096141. Registered office: Pixham End, Dorking, Surrey RH4 1QA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Calls may be recorded. www.friendslife.com Friends Life is a registered trade mark of the Friends Life group. BGR/4507/FEB10-P