Offering group health and life cover to employees is a popular way for New Zealand businesses to enhance their benefits package. By pooling a workforce into a single policy, companies often secure more favourable rates and coverage terms than individuals can obtain on their own. Yet while the advantages can be significant, there are also potential challenges to consider. This article provides an in-depth exploration of how group schemes are structured, why premium costs are typically based on average or pooled risk (including employees’ ages), and why policies often have minimal or no exclusions.
Understanding Group Schemes
Group health and life insurance enables businesses to purchase coverage under a single “master policy.” Employees are enrolled in that policy, and premiums are paid by the employer, the employee, or split between both. Such coverage may include:
Health Insurance: Doctor visits, specialist consultations, hospital stays, and optional extras (e.g., dental or optical).
Life Cover: A lump-sum payout if an employee passes away or, in some cases, if they are diagnosed with a terminal illness.
Additional Benefits: Riders like trauma cover, total and permanent disablement (TPD), or income protection.
Minimal Exclusions and Simplified Underwriting
One of the hallmarks of group schemes is their low-barrier entry compared to individual policies. In many cases, these plans waive or minimize medical underwriting, meaning pre-existing conditions that would normally limit or exclude coverage might be covered under a group arrangement. This broad acceptance is possible because the insurer considers the “pooled risk” of the entire group, rather than assessing each individual in detail.
How Premiums are Calculated
A key difference between group and individual insurance lies in how premiums are determined. Instead of each employee being charged based on their own health status, age, and lifestyle, insurers often take the average age and risk profile of the group (or multiple age bands) to establish a uniform or semi-uniform rate. The specific approach can vary:
Composite or Flat Rate: In some group schemes, insurers charge a single rate for every member, based on the overall demographics (particularly the average age) of the workforce.
Age-Banded Rates: Other policies group employees into tiers (e.g., ages 20–29, 30–39, 40–49, etc.). Each band has a set premium, reflecting the likelihood of higher claim costs as people age.
In both models, employees with health conditions that might have resulted in exclusions or higher premiums in an individual policy typically pay the same rate as their healthier colleagues. This collective approach to risk often translates into lower premiums for most staff members than they might otherwise obtain.
Advantages of Group Scheme Health and Life Cover
Cost Savings for Employees
By averaging out risk, group policies tend to reduce individual premiums. Employees who might have faced high premiums due to age or a pre-existing condition can access more affordable cover. Even younger or healthier employees may benefit from a simplified, lower-rate process thanks to the overall risk pooling.
Strong Employee Attraction and Retention
Healthcare is a major concern for many families, and life cover provides peace of mind for those worried about dependents. An employer-subsidised group scheme signals a commitment to staff well-being, positioning the company as an attractive workplace. In competitive labour markets, such benefits can tip the scale in favour of your job offer.
Simplified Administration
With a group scheme, a single policy covers multiple employees. Employers pay (or co-pay) one premium invoice per billing cycle and typically communicate with a single insurance provider. Adding new employees or removing those who leave is usually straightforward, reducing the administrative burden compared to multiple individual plans.
Minimal Exclusions and Limited Underwriting
In many group health and life policies, no exclusions or only minimal exclusions apply for employees. This means those with known health issues, who might otherwise struggle to get cover, can join the scheme. Where any underwriting is required, it is usually highly simplified.
Potential Drawbacks and Challenges
Financial Commitment for Employers
Employers covering the full or a significant portion of premiums must maintain consistent budgeting. An economic downturn or internal funding shortfall can make these recurring premium costs more challenging, sometimes leading companies to reduce benefits or pass more costs to staff.
Limited Individual Customisation
Because the policy is a one-size-fits-all group arrangement, employees cannot always tailor coverage to their unique circumstances. Younger staff might be subsidising older colleagues, or vice versa. Some employees with specialised needs may prefer to hold an additional, individual policy.
Risk of Premium Increases
Group rates are reviewed periodically. If the group experiences a higher-than-expected number of claims—particularly large claims for surgery or life cover payouts—insurers may raise premiums for the entire group at renewal. This can make budgeting and long-term financial planning more difficult.
Administrative Complexity for Fast-Growing Companies
Even though a single master policy may simplify billing, a company with rapid employee turnover or major expansions could find it time-consuming to keep the policy updated. Each new hire has to be enrolled, and departing staff must be removed, requiring ongoing coordination with the insurer.
Potential Tax Implications for Employees
In some cases, employer-paid life/health insurance premiums may be viewed as an additional form of remuneration, potentially incurring fringe benefit tax (FBT), so professional advice is always recommended to avoid surprises.
The following links provide further information on tax implications;
Implementation Tips and Ongoing Management
Assess Workforce Demographics: Consider average age, existing health concerns, and salary levels. An older workforce may need more comprehensive life cover and health benefits, whereas a younger team might value lower premiums and simpler coverage.
Compare Multiple Providers: Different insurers offer varying policy structures, premium calculations, and added features (e.g., wellness programmes, mental health support). Gather quotes from at least two or three providers to find the best fit.
Engage a Broker or Adviser: A specialist familiar with group schemes can recommend options and handle negotiations. Their expertise helps in tailoring a plan that aligns with both budget constraints and workforce needs.
Annual Reviews: Premium rates, the group’s average age, and employee needs can change. Revisit the policy each year—perhaps before the end of the financial year—to see if updates are needed.
Educate Employees: A robust communication strategy ensures staff understand what is covered, how to make claims, and why group coverage is beneficial. Clear information reduces confusion and encourages employees to value the benefit.
Conclusion
Group health and life insurance can be an invaluable asset for New Zealand businesses aiming to offer comprehensive benefits while managing overall costs. By levelling the playing field through average-age-based premiums and minimal exclusions, these schemes grant access to employees who might otherwise be locked out of individual policies. At the same time, businesses can differentiate themselves in a competitive job market, streamline administration, and potentially leverage tax advantages.
However, companies must weigh the ongoing financial responsibility and the possibility of premium spikes if claims are high. As with any significant investment, it is essential to analyse employee demographics, business objectives, and plan structures. With careful planning and periodic policy reviews, a group scheme can strike a balance between corporate stability, employee well-being, and a budget-friendly approach.
