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What is a free limit?
A major advantage of a group arrangement is that members below the free limit don’t normally have to be medically underwritten. The maximum free limit is different for all our Group Protection products. To find out what the maximum free limit is for our other products, you should visit the ‘What is a free limit’ section for Group Income Protection and Group Critical Illness Cover.
Free limit | |
|---|---|
| What does this mean? | We can provide cover up to a certain amount without the member having to provide medical evidence about their health and pastimes. |
| How it works | We’ll set the free limit when we quote for a scheme. The free limit will depend on the number of eligible members joining and the level of benefit entitlement. It will also depend on whether the eligibility conditions include membership to a pension scheme, where membership is voluntary. If we don’t know this when we produce our quote, we’ll assume that at least 75% of eligible employees will have joined the pension scheme at the policy start date. We’ll reduce the free limit we quoted if this is not the case. We’ll usually set it as an amount of scheme earnings to make it easier to identify members who will need to provide medical evidence because their benefit level is more than the free limit. |
| Maximum free limit | £1.25 million scheme earnings For schemes with over 5,000 members or a £500,000 premium, we can increase the free limit to track the standard lifetime allowance, which is £1.8 million for the tax year 2010/2011. We’ll tell you what the free limit is when we send you a quote. |
The free limit is based on the number of members in the scheme
The free limit is based on the number of members in the scheme and is worked out as follows:
| Number of members (N) | Free limit formula (benefit) |
|---|---|
| Under 10 | Nil |
| 10 - 50 | £20,000 x N |
| 51 - 74 | £1,000,000 + (£10,000 x (N - 50) |
| 75+ | £1,250,000 |
Free limit based on scheme size
This table below shows the maximum free limit that’s available for each scheme insured with us:
| Number of members (N) | Free limit formula (benefit) |
|---|---|
| Under 10 | Nil |
| 10 | £200,000 |
| 20 | £400,000 |
| 30 | £600,000 |
| 40 | £800,000 |
| 50 | £1,000,000 |
| 60 | £1,100,000 |
| 75 | £1,250,000 |
| 100 | £1,250,000 |
| 200 | £1,250,000 |
Converting the free limit to scheme earnings
To make it easier to see who needs to be medically underwritten, the free limit can be converted into scheme earnings. For example, for a scheme with 75 members (all on a benefit of five times the scheme earnings), we would normally offer a free limit of £250,000 scheme earnings (1,250,000/5 = 250,000).
If a life assurance benefit is insured with a dependants’ pension, these are often combined to see if an employee’s cover is more than the free limit. This involves a calculation to convert the dependants’ pension from an annual benefit to an equivalent lump sum, and then adding this to the life assurance benefit. We’ve used the most common rates in the example below:
If a life assurance benefit is insured with a dependants’ pension, these are often combined to see if an employee’s cover is more than the free limit. This involves a calculation to convert the dependants’ pension from an annual benefit to an equivalent lump sum, and then adding this to the life assurance benefit. We’ve used the most common rates in the example below:
| Pension increase rate | Capitalisation factor |
|---|---|
| 0% | 17 |
| 3% | 26 |
| 5% | 40 |
| Limited price indexation (LPI) maximum 2.5% | 25** |
| LPI maximum 5% | 26** |
** This factor may be varied in line with LPI changes.
For example if an employee’s benefits are:
Life assurance benefit = £420,000
Dependants’ pension = £52,000
Escalation at LPI maximum 2.5% = 25
The calculation is £52,000 x 25 + £420,000 = £1,720,000. If the free limit is £1,000,000, then the employee would be over the free limit.
The capitalisation factor we apply will vary for each scheme and our quote will show the actual rate used.
For example if an employee’s benefits are:
Life assurance benefit = £420,000
Dependants’ pension = £52,000
Escalation at LPI maximum 2.5% = 25
The calculation is £52,000 x 25 + £420,000 = £1,720,000. If the free limit is £1,000,000, then the employee would be over the free limit.
The capitalisation factor we apply will vary for each scheme and our quote will show the actual rate used.
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