Employee Benefits Pensions Annuities Micro insurance and Health Insurance

 

Employee Benefits Pensions Annuities Microinsurance and Health Insurance

Employee Benefits  Pensions  Annuities  Microinsurance and Health Insurance:  Life is about experiencing every good bit of it throughout one’s lifetime; be it a walk in the park with your parents or building memories of playing with your little one. At Religare Health Insurance, we understand that these experiences can truly rejoice when one lives a healthy life without having to worry about any unforeseen medical issues. You can search for google.

Learning Objectives :

In this chapter, we will learn about:

  • Group insurance and retirement plans
  • Statutory and voluntary employee life insurance plans
  • Statutory retirement benefits for employee groups
  • Voluntary retirement plans for employee groups
  • Voluntary individual pension and annuity plans

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1.GROUP RETIREMENT PRODUCTS INSURANCE AND RETIREMENT PRODUCTS :

Group insurance is a unique product that offers life insurance protection to a group of people under one policy contract. These policies are used by employers, associations, societies, etc., and they help people enjoy life insurance benefits at very low costs due to the economies of scale available when insuring large groups of people. Life Insurance Corporation of India (LIC) has the following schemes available for groups:

Life insurance and retirement schemes for groups
i) Group term insurance schemes
(ii) Group insurance scheme in lieu of EDLI
(iii) Group critical illness rider
iv) Group saving linked insurance scheme retirement schemes
(v) Group superannuation scheme
(vi) Group gratuity scheme others
(vii) Group mortgage redemption assurance scheme

The above schemes include life insurance and retirement plans. Employees are the beneficiaries of these schemes and so these plans are also called employee benefit plans. Products like the group mortgage redemption plans are available for groups of individuals taking loans from a financial institution. Individual insurance plans are also marketed to employees and employers. These are also discussed in this Chapter Employee benefits and other groups insurance products constitute a major portion of business for life insurance companies. These products are generally marketed directly and intermediaries are not used for selling group products. Lower distribution costs and potential of large contracts make this a lucrative market Employers voluntarily offer many groups insurance and pension benefits to their employees due to tax benefits usually associated with such products.

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The employee benefits products work in two ways. In some cases, the employer pays the entire or part of the cost of insurance or pension. In other cases, the employer sets up the benefit of a plan under which an employee can elect to participate by paying the full cost of his coverage. Some employer-provided insurance benefits for situations like death, accident, illness or retirement is a part of statutory requirements mandated by law.

2. STATUTORY AND VOLUNTARY EMPLOYEE LIFE INSURANCE PLANS

1 Employees’ Deposit Linked Insurance (EDLI) Scheme,1976(Statutory)

All establishments to whom the Employees Provident Fund and Miscellaneous Provisions Act, 1952 applies, have a statutory liability to subscribe to the Employees’ Deposit Linked Insurance Scheme. This scheme provides life insurance cover for all employees under the purview of the Act. Employers are required to make contributions to the insurance fund at the rate of 0.5 percent of pay (basic wages, dearness allowance including the cash value of food concession, and retaining allowance, if any). The employee, however, is not required to make any contribution. The death benefit amount for the insured is equal to the average
balance in the employee’s provident fund account. The central provident fund commissioner has approved some life insurance companies’ group insurance policies as an alternative to EDLI.

Employee Benefits Pensions Annuities

The life insurance plans offered by the private life insurance companies guarantee a certain life insurance cover to the employees irrespective of the actual balance in the provident fund. Organizations find it advantageous to take the life insurance cover through a private insurance company instead of the government provident fund. The private insurance companies may offer employers the life insurance benefits for a lower premium. They also offer experienced and professional administration services for employee data management and claims payments. The settlement of a claim is quicker as insurance companies require only the death certificate and the duly filled claim form from the employer. Life insurance companies also, offer customized products with additional accident riders. There are tax incentives also associated with insurance. plans for the benefit of both the employer and the employees. Premium paid. by the employer is treated as normal business expenses for income tax purposes. For the employee, the cover amount is fully tax-free in the hands of the beneficiary.

2 Voluntary Life Insurance Plans: 

Voluntary group life insurance offered by life insurance companies are of three types-group term life; group insurance savings
scheme; and employer-employee plans and payroll deduction plans.

Group term life insurance: Group life insurance is the life insurance of a group of people under a single policy. Group life insurance can be offered only to groups that exist as entities for purposes other than insurance. Factory workers, bank account holders of a bank or other such groups can be given group insurance. If groups come together solely for the purpose of insurance they cannot be offered group insurance cover. The term plan offered under a group term life insurance policy is a one-year renewable term policy. The cost of such insurance is low as compared to the individual policies taken by the same people.

Employee Benefits Pensions Annuities

Group policies are cheaper because statistics show that the mortality for employee groups is lower than the population at large. The group plan has ministered through a single master policy document. Individual policies are not issued to employees. The medical requirements are nonmedical limits are very high so most limited and individuals fall under the nonmedical category called the free-cover limit or no evidence limit. The risks associated with a group policy are also lower than an individual policy because of group-term policies only for a term period of one year.

Employee Benefits Pensions Annuities

There are restrictions regarding minimum and maximum eligible age limit for cover, which is usually 18 and 60 years, respectively. Each insurance has its own company specifications about the minimum members required for the group cover. Most policies require a mandatory minimum of 75% of eligible members at inception. The insurance company may require the compulsory participation of all new members who join the group. The eligibility requirements usually contain a clause which states that the cover can be offered to only those people who were present at work on that particular date, at the start of the policy. This clause presumes that people who are ill or are not present due to any reason will be excluded from the cover. This limits the insurance company’s risk by ensuring only healthy individuals through group policy.

Medical tests and other evidence of good health may be required for some members whose cover exceeds the free cover limit face amount of coverage is either uniform for all members or is based on the income of the employee to a maximum of
three times the yearly income. Some insurance companies offer the option of converting group coverage into an individual
coverage if the employee desires or the advantage of covering spouse and children subject to minimum participation levels.
Riders like accident benefits and critical illness are also offered in some cases.

Employee Benefits Pensions Annuities

Premium payments can be made wholly by the employers or may risk being contributory with the members paying a percentage of the premium. This plan offers tax benefits for both the individual and the organization. The premiums paid by the employer are allowed as business expenses and the amounts are not treated as perquisites in the hands of the employees. The premiums paid by the members are eligible for income tax deduction under Section 80 C. The benefits paid under the scheme are tax-free. The benefits received on the death of the insured are paid to the nominee and are tax-free.

Group savings linked insurance scheme: A voluntary product offered by some life insurance companies such as LIC is a saving
linked plan which provides both death benefit and savings element in the same plan, unlike the group term life plan which offers only a death benefit. The group savings linked insurance scheme serves the employee’s need for insurance protection along with accumulating savings for retirement. This is not a statutory requirement by the semi-government, however, government organizations, public sector organizations, and large private business houses offer such schemes to their employees.

Employee Benefits Pensions Annuities

The objective of this plan is protection at low cost without individual evidence of health and attractive returns on savings to meet post-retirement needs. Procedures for granting lite cover are relatively simpler than scheme linked insurance
during the employment government; however, many individual insurance products. Employers can introduce such plans provided a certain percentage of employees are willing to join the scheme. Premium is decided on the basis of the size of the group and the occupation of the group. The premium has two components, which savings premium. A risk premium is utilized to offer
life cover and the savings premium is accumulated in member’s accounts.

Double accident benefits may be allowed by some life insurance companies to the extent of the sum assured for a higher premium. The rate of interest allowed on saving a portion of the premium is around 8% compounded annually for most plans. Any employee is eligible to join the scheme subject to the insurability condition that the employee should not be absent from medical grounds on the date of commencement of the scheme. All employees who have not crossed the retirement age are eligible to join the scheme. Like the group term life plan, all future employees have to join the scheme compulsorily. Employees’ total contribution, savings as well as a risk premium, is entitled to income tax deduction up to Rs. 1 lakh as per current
income tax laws. The entire claim amount payable on retirement; or leaving service; or on death; is free from income tax. The premium paid by the employer towards insurance cover is treated as business expenses.

Employer-employee insurance and payroll deduction plans: Employee insurance benefits offered by life insurance companies include certain individual insurance plans that are sold to the employees. Unlike the two plans discussed above, these plans do not require any minimum participation of a certain number of employees and are administered like individual policies. The premium for these policies are paid by the employee or by the employer. These plans are individual plans and are administered through the
employer only for ease of marketing and distribution. Since the products are the usual retail products offered by the life insurance
companies, these plans are usually sold through the agency channels. Employer-employee insurance is an individual life insurance policy that an employer offers to the employee as a benefit or a reward.

Employee Benefits Pensions Annuities

It can serve as a retention tool and can be used as a long-term incentive plan for the selected employees. The plan is underwritten as individual insurance, and the employer pays the complete premium. Therefore, employees can choose from the entire range of products sold by life insurance companies like endowments, term or whole life plans. Unlike a group plan
where the employee is covered only under a renewable term plan for one year, the employer-employee plan allows the employee
to choose a plan as per his need. These plans do not have a fixed participation level and any number of employees can be insured.
Since it is an individual plan the maximum cover is based on the paying capacity of the individual employees depending on his salary.

The medical requirements are as per the life insurance company’s medical limits for individual life insurance products. The employer’s contribution towards premium is treated as a business expense, thereby, allowing the company to do better tax planning. The employer can deploy the insurance scheme as an additional perk to attract talent to its organization. Such
schemes could also assist in reducing attrition amongst existing employees. Such policies could be owned either by the employer or the employee. The employee appoints a nominee in case the policy owner is the employer and the employer makes a conditional assignment? agreeing that all death proceeds would be payable to the insured’s beneficiary and maturity proceeds including cash surrender value would be in the name of the insured provided the insured remains with the employer till the maturity of the policy.

Death benefit proceeds are passed on to the employee’s family and are tax-free. The employer has to obtain the approval of its board of directors or similar competent authority to initiate the application process. The approval from the board should contain all details of the policy conditions and authorize a person to execute the scheme with the life insurance company and ensure timely payment of the premium. The employer-employee schemes are particularly useful for employees of organizations which do not provide benefits such as a provident fund or gratuity to their employees’ Payroll deduction plans are individual
plans sold to employees at their workplace. Here the only role of the employer is to make premium remittances through monthly
payroll deduction from the employee’s salary.

Employee Benefits Pensions Annuities

This type of insurance is also called worksite marketing as the policies are sold through employees’ presentations at the employee’s workplace/office. The insurance life company may offer a small discount on premium through a payroll deduction plan or may offer simplified underwriting. The payroll payment plan also is known as the salary savings scheme policies are intended to cater to the needs of the working classes. The insurer arranges with the employer to deduct the premium from the salary bill of the worker policyholder and remit the same to the insurer every month. This scheme benefits the policyholder as the premium is deducted monthly, making payment easy and minimizing default. The insurance company is also benefited from the policy, as the company is assured of the premium remittance without default.

The insurance company benefits from the bulk Receipt of the premium of many workers in that organization at the same time. This entails lesser administrative costs and, therefore, the insurer charges a yearly premium rate despite effecting a monthly collection. The agent also benefits from such policies as there are fewer chances of lapses and he can be assured of his regular renewal commissions.

3. STATUTORY RETIREMENT BENEFITS FOR EMPLOYEE GROUPS

Focus on saving for retirement has increased in recent years. Factors like increasing lifespan, decrease in the joint family system and the economic inflation has contributed to increased awareness of the need to save for retirement. Apart from those employed with the central or state government, a vast majority of Indians do not guarantee pension after their retirement.
The government has instituted some statutory plans as a social security measure for those employed in industries and
establishments in the public and organized private sectors. The Employees Provident Fund Organization (EPFO) administers the
Employees Provident Funds and Miscellaneous Provisions Act, 1952 for these organizations.

This act covers a large number of industries and organizations which have more than 20 employees on its role. Both the employer and the employee contribute to the fund at the rate of 12% of the basic wages, dearness allowance and retaining allowance, if any, payable to employees per month. Voluntary higher contributions are also acceptable at the joint request of the member (employee) and the employer. The rate of interest is fixed by the central government in consultation with the central board of trustee of the Employees’ Provident Fund every year during March/April. The fund is available to the employee at retirement or to his heirs at death. The employee can also withdraw from the fund for certain predefined events in his life such as buying a
house or marriage of a daughter, etc. EPF enjoys tax benefits with contributions, earnings, and accumulation of all subscribers to the EPF being tax-free.

Employee Benefits Pensions Annuities

The employer also gets a tax benefit to the extent of his contribution Apart from EPF, the Payment of Gratuity An act is another statutory retirement savings the scheme put in place by the government. It is administered by the central government in
establishments under its Control, establishments having branches in more than one state, major ports, mines, oil fields and
the railways. The state governments and union territory administrations are responsible for administering the Gratuity Act in all other cases. While the Employees’ Provident Fund Scheme, 1952 is administered through the government, the payment of gratuity can be operated through life insurance companies as well. According to the Income Tax Act, 1961, the employers as trustees of a gratuity fund can either manage the funds themselves with or without the help of the private fund managers or entrust the investment to a life insurance company by entering into a group gratuity scheme.

The Payment of Gratuity Act, 1972 applies to factories, mines, oil fields, plantations, transport, railways, motor transport undertakings, companies, shops and other establishments employing 10 persons or more. On completion of five years of service, employees are entitled to the payment of gratuity computed at 15 days wages for every completed year of service, subject to the maximum of Rs. 3,50,000. In the case of seasonal establishments, gratuity is payable at the rate of seven days’ wages for each season. The gratuity is paid on retirement, resignation, disability or death.

The Income Tax Act exempts gratuity from income tax for all government employees. For non-government employees, the exemption is limited to the amount of statutory benefit which is approximately half-month’s salary for every completed year of service up to a maximum of Rs. 3,50,000 For the employer, any sum paid by way of contribution towards an approved gratuity fund created for the exclusive benefit of his employees (maximum contributions of 8.33% of employees, salary) under an irrevocable trust is allowed as a deductible business expense. Interest income on the fund is also tax-free. Gratuity payment is a statutory liability for an organization, and it tends to increase as salaries and tenure of employees increase.

Employee Benefits Pensions Annuities

Gratuity payout can work to a substantial in case of large growing organizations and, therefore, paying a gratuity from its current revenue can be difficult for the employer. Insurance companies offer gratuity products that help the forward funding of gratuity liabilities. The gratuity product offered by the life insurance companies support organizations in the establishment, plan, and design of an approved gratuity trust fund. They also and provide actuarial, administrative investment management along with some additional options such as group life insurance. The amount of gratuity payable to employees is the same as provided for in the rules of the gratuity trust fund. The extra benefit, which the insurance company provides to the members of the fund, is the term insurance cover equivalent to the future gratuity amount on the normal retirement date based on the current salary.

In case of the death of an employee before his retirement, the accrued gratuity is paid out from the trust fund with the insurer, and the future service gratuity is also paid as a death benefit. All other services including annual actuarial valuation of the gratuity liability and administration of the fund and the scheme are free of cost. The interest earned by the insurer is given to the fund at the end of each year. The interest varies according to the size of the fund. The adoption of the scheme saves considerable labor and cost otherwise to be incurred by the trustees or the employer on administration, investment and actuarial valuation of the gratuity trust fund.

4 VOLUNTARY RETIREMENT PLANS FOR EMPLOYEE GROUPS

1 Group Pension Plans:

Group Superannuation :

The word superannuation means to retire from service, especially with a pension. It seems to be loosely derived from the word annuity. An annuity is an investment in a single lump sum or through installments paid over a certain number of years, in return for which a specific sum is received every year, every half-year or every month, either for life or for a fixed number of years. Payment of a regular superannuation income to the employees is not a statutory obligation for employers in India. Group
superannuation schemes are a part of voluntary employee benefits that many organizations subscribe to. Under this scheme, the employer pays a regular superannuation pension to the employees. To fund this payout to retired employees, the employer forms an irrevocable trust to which the employer transfers funds as required.

The trustees can either manage the trust themselves by investing in the trust fund according to the prescribed investment pattern or they may purchase a group the amount required to secure the benefit is drawn from the pooled fund. The amount of pension payable to the employee or his dependents is pre-determined as a percentage of salary last drawn. The amount of money required to be contributed to securing the benefit is computed by the insurers from time to time through actuarial valuation. The employer makes the necessary contributions through the trustees to accumulate the required fund. The defined contribution scheme defines the annual contribution that the employer will deposit into the scheme for each employee. The amount of contributions to the superannuation scheme for each employee is fixed and is expressed as a percentage of the salary.

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These contributions get accumulated with interest income and the accumulated value is utilized to purchase annuities, and accordingly, the payment is made. Individual employee accounts, reflecting the contributions and the interest accumulations, are maintained. On retirement, the individual account is released to provide funds to secure the benefits under the scheme. The scheme can be either fully contributed by the employer or by both the employer and the employee. An employee can choose from various annuity options or opt for partial commutation of the corpus at retirement. The employers’ contribution to approved superannuation schemes is treated as fringe benefits, and the entire contribution is taxed at the rate of 30% (with the 10% surcharge, and 2% education cess, the effective rate is 33.66%.) The maximum contribution that an employer can make is 27% (i.e., Provident
+Superannuation) of the employee’s annual salary. Interest income on the fund is a value (1/3) on retirement is tax-free and benefits payables on death are exempt from the tax. Employee’s contribution, if any, qualifies for tax exemption. The regular non-commuted annuity paid to the employee is taxable as
income.

5. VOLUNTARY INDIVIDUAL PENSION AND ANNUITY PLANS

The retirement needs of individuals are estimated to be 60% of pre-retirement income. The statutory and voluntary
employee retirement plans of private or government organizations are inadequate to provide support to this extent. Pension plans offered by the life insurance companies can help supplement the existing retirement benefits that an individual gets through an
employer or through other personal investments in various assets. Pension plans offered by the life insurance companies help individuals plan effectively for their retirement and provide individuals with a regular income in their old age. Pension plans offered by the insurance companies help individuals build a retirement corpus. On maturity, this corpus is invested in generating a regular income stream, which is referred to as pension or annuity.

Most pension plans offered by life insurance companies have no death benefit and are distinct from life insurance plans. Pension plans can be traditional or unit-linked. In traditional pension plans, a major portion of the premium is invested in bonds and government securities (G-Secs). The returns may be low but are guaranteed and the risk of investment is borne by the insurance company. The unit-linked pension plans operate like the mutual funds with the premium being deposited in a debt or an equity fund according to the client’s desire. In a unit-linked pension plan the client chooses the premium contribution amount and after charges are deducted, the balance goes as investment in the chosen fund. Investment is represented as NAV.

Employee Benefits Pensions Annuities

The value of units in the account at the time of vesting is used to provide an annuity option as listed later in this section. At the time of opting for the pension plan, the policyholder defines his retirement age (known as the vesting age). At the vesting age, he receives one-third of the accumulated corpus as a lump sum payment. This sum (subject to a maximum of one-third of the corpus) is a tax- free in the hands of the policyholder. The balance amount(accumulated corpus payment) is converted into a monthly income, also known as an annuity. The policyholder can choose to invest the balance sum with any life insurer to obtain a monthly income for the rest of his life. The period over which the policyholder receives the monthly income is known as the annuity period. Life insurance companies provide certain options for annuity payment which the policyholder can choose according to his need.

These options are described later in this section. The monthly income is taxable as per the policyholder’s tax slab. Pension plans are classified as immediate annuity plans and deferred annuity plans. In case of immediate annuity plans, commences within one year of having paid the premium (which is usually a one-time premium). The premium paid of the immediate annuity policy is also known as the purchase price. Currently in India, very, few life insurance companies offer immediate annuity plans. In case of a deferred annuity, the annuity/pension does not commence immediately; it is deferred up to a time, which is decided by the policyholder. For example, if an individual buys a pension plan with the tenure of 30 years (also known as the deferment period), his annuity will begin 30 years after the date of the commencement of the pension plan. Deferred annuity premiums can be paid as a single premium or as regular premiums. A deferred unit-linked annuity plan is illustrated with an example in Table

TABLE Unit likens deferred annuity plan

Employee Benefits Pensions Annuities

Pension plans come with various annuity options. The common options available to the policyholders are as follows:

(i) Lifetime annuity without return of purchase price: The individual receives a pension till he is alive. The pension ceases on the occurrence of his death, and the insurance contract comes to an end.

(ii) Annuity for life with a return of the purchase price: If this option is exercised, the individual receives a pension till he is alive. In the event of his death, the purchase price of the annuity is paid out to his nominees/beneficiaries. Purchase price here means the maturity amount, which includes the basic sum assured plus the bonuses/additions if any.

(iii) Lifetime annuity guaranteed for a certain number of years: Under this option, an individual receives a pension for a certain
number of years (as prescribed by the plan) irrespective of whether he is alive for the said period or not. For example, if an individual has opted for a Lifetime annuity guaranteed for 15 years, and he dies after only 3 years, then his nominees will keep receiving annuity for the remaining 12 years (i.e. 15 years less than 3 years). After the 15-year period is over, the annuity will cease, and the pension plan will draw to a close.

Employee Benefits Pensions Annuities

(iv) Joint life/last survivor annuity: The individual receives a pension till he is alive. In case of his death, his spouse receives the pension Under the joint-life/last survivor annuity with return of purchase price, in case of death of both the individual as well as his spouse, the purchase price of the annuity is paid out to the nominee. The share of employee benefits insurance and pension products in the overall business of life insurance companies has grown greatly during the last decade.

Apart from consumer interest due to changing demographics which has spurred growth, private life insurance companies have started to focus on the employee benefits segment as a market strategy. In spite of increased interest by consumers and life insurance companies, recent surveys found that one-third of the organizations in India do not offer. significant insurance or retirement benefits to the employees. The study reveals an inconsistency between the benefits needed by Indian employees and those offered by Indian employers. The need for employee benefits for Indian workers is so great that they are willing to pay the full cost themselves.

The survey results showed that out of those who do not own any insurance and retirement products through their employer, 51% are interested in purchasing individual term life insurance and 48% want to purchase individual retirement-planning products. This demand will only increase as the population ages and lifespans increase. The OASIS (Old Age Social and Income Security) project was commissioned by the Ministry of Social Justice and Empowerment to study the shortcomings of existing pension provisions in India and propose important changes. The OASIS report recommended the establishment of a new pension system for India’s 30 crore informal sector workers who are excluded from the formal Pension Provisions. This pension system is recommended to be based on individual retirement accounts created by the individual members.

Employee Benefits Pensions Annuities

It recommends that administration be centralized for lower costs and portability, and assets are managed by competing for important changes. professional pension fund managers. This report has served as the basis for the actions leading to India’s pension reform and the formation of the Pension Fund Regulatory Development Authority (PFRDA). PFRDA will function as a regulator for the New Pension Scheme (NPS), a defined contribution pension system which would be launched after the PFRDA bill is passed by the parliament. The NPS will be available on a voluntary basis to all persons including the self-employed and will help to provide retirement income to the largely Indian workforce.

Employee Benefits  Pensions  Annuities  Microinsurance and Health Insurance

REVIEW QUESTIONS
1 Fill in the blanks with appropriate terms.

(a) Group life insurance premiums are…………than those of individual life insurance

(b) The…………..scheme provides life insurance for all employees covered under the Employee Provident Fund Act.

(c)Employer-employee and payroll deduction are individual insurance plans sold at the…………..
(d) Under the payment of gratuity act, on completion of five years service employees are entitled to payment of gratuity at………………. wages for every completed year of service.

(e) A person’s retirement need is estimated to be…………….. of his preretirement income.

(f)With regard to pension plans, the retirement age specified by the policyholder is known as

2 Give the answers in brief.

(a) What are the benefits of a group term life insurance plan for the employee?
(b) What are the statutory retirement benefits available in India?
(c) What is a defined contribution plan?
(d) What are the various annuity options that an individual can opt for in a pension plan?
(e) What are the advantages of selling employee benefit products for life insurance companies?
Answers
7.1 (a) lower (b) Employee Deposit Linked Insurance (c) workplace (d) 15 days (e) 60% (f)vesting