Introduction
Increasingly businesses are faced with the difficult
problem of dealing with a director, senior manager or
employee who, due to accident or illness, is disabled
for a lengthy period and who in many cases, may never
be able to work again. This problem has to be considered
against the background of an individual's continuing
overheads, mortgage rates, pension contributions, life
assurance and medical insurance costs family commitments
and the extra cost of being disabled.
Most company pension schemes will provide benefits for
the individual who has reached retirement date or for
the member who dies before retirement. Disability causing
a lengthy absence cannot obviously be dealt with by
a pension scheme and if the disability causes early
retirement, because the necessary contributions will
never be paid, the amount of the individual's pension
may be very small indeed.
Some companies try to treat each case of prolonged disability
on its' merits and take responsibility for continuing
payments of salary. This has the obvious disadvantages
of:
a. Even a large company could find it a serious drain
upon its' resources to continue salary payments, bearing
in mind that a substitute will invariably have to be
found at a similar salary level.
b. The decision needs to be taken against current trading
conditions which might have a considerable bearing upon
the ability for generous treatment and which could vary
between employees dependent upon the date of disablement.
Where an ex-gratia payment is paid it would have to
be made clear to all employees that this would not set
a precedent for the future.
c. The individual will be concerned as to how long the
company could maintain its' generosity to him, and future
take-overs or changes in management could well affect
his income.
A Long Term Disablement Scheme offers
a much kinder and more practical answer, and in addition
to providing a regular and continuing income to a sick
employee, it can include provision to maintain pension
contributions and life assurance premiums which in the
circumstances are most important.
The scheme provides an income for any member who has
been disabled after a period of time called the waiting
period. The income continues until the member recovers
sufficiently to return to work, or if there is no recovery
until normal retirement date.
Disablement in scheme terms' usually means wholly prevented
through sickness or injury from following normal occupation
and not following any other. Alternative definitions
of disability can be provided for specialised occupations
or particular workforces. The waiting period is agreed
at the outset of the scheme, and can be 13 or 52 weeks
or, as is generally the case, 26 weeks after the employee
stops working.
Employers will normally continue paying employees until
the end of the waiting period when the income payments
under this scheme will start.
Features of a Scheme
1. No medical evidence on the state of health of members
is necessary when the scheme commences, up to the "free
cover" level of benefit, which depends on the number
of members and level of benefit required. Typically
"free cover" of £75,000 benefit will
apply to a large scheme and evidence of health is required
only for those parts of benefits above the free cover
level.
2. The benefit level selected can include, if desired,
extra benefits to cover the employers continuing liability
for National Insurance Contributions while the employee
is absent from work, at either the contracted-in or
contracted-out rate.
3. Similarly, the benefit level can include the cost
of pension contributions from the employee, from the
employer or both.
4. The scheme is normally arranged on the basis that
the benefits will increase by an agreed percentage every
year during payment, to offset the erosion of benefits
by the effect of inflation.
5. Regardless of the claims experience, the insurer
has to keep the scheme in force. The only circumstances
in which he can discontinue the scheme is if the company
fails to pay its' premiums when they become due, or
if any eligible person fails to join the scheme.
The Income Benefits
The benefit is usually expressed as a proportion of
the employees earnings, commonly one half or two-thirds,
and is normally based on the earnings level before disability
occurs.
The income in respect of any employee who has been disabled
will start to be paid as soon as the waiting period
has ended, and will continue until either:
1. The member is able to return to work; or
2. The member reaches retirement age; or
3. Agreed age or period for termination of benefits;
or
4. The member dies.
Premiums
The premiums are payable at the start of each year
or in monthly instalments, and are payable for all members
except any to whom benefits are at the time being paid.
The Company's tax position
In the case of the Company, the premiums are fully allowable
as a trading expense against Corporation Tax.
In the case of a Partnership the premiums are fully
allowable as a trading expense against Partnership profits.
The benefits create no tax liability because the payment
of benefit to the firm is counterbalanced by the payment
of a proportion of salary to the member.
A Members tax position
When the benefit becomes payable it is paid to the firm
so that it can then be passed to the employee utilising
the usual procedure. This system has the advantage of
perpetuating the employees pay, without affecting his
or her tax position at all.
Claims
Normally a claim will be submitted towards the end of
the waiting period and a standard form completed by
the employer, the employee and the employee's doctor
is required.
Administration
A scheme is extremely easy to administer and once in
force a list of members is supplied by the employer
at the start of each year, showing the members' individual
annual salaries. New entrants and members leaving the
scheme can be automatically provided for and dealt with
in a single year end adjustment
Quotations
To obtain a quotation a list is needed of the date of
birth, gender, salary and work location of each person
to be included in the scheme.
The annual premium will then be calculated on the basis
of this data in relation to the level of income benefits
and waiting period required.
Please Note
This summary only provides brief details
of typical cover provided under the policy. For precise
policy, terms, conditions and exclusions please request
a specimen policy document.
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