Understanding the workings of graded covers within group insurance policies

A common way to differentiate insurance benefits is on the basis of designation. This criterion is used for health, life and accident insurance. Here, the sum assured (SA) could be differentiated based on the designation level. Typically, organisations would categorise all designations into three or four groups. For each category, a separate SA may be decided.

For example, all employees at the field level may be given a health insurance SA of Rs 2 lakh. The starting supervisory level may be given an SA of Rs 3 lakh, the middle management an SA of Rs 5 lakh, and so on. Sometimes the benefits can be nuanced based on designation. For example, within health insurance, the room rent eligibility for field-level staff may be 1 percent of SA, whereas for senior management there may not be any room rent limits.

Also read: Moneycontrol-SecureNow Health Insurance Ratings: Your guide to choosing the right policy 

The salary link to group life and accident covers

For accident and life insurance, generally SA is allocated to each designation. For instance, field-level staff may be assigned an SA of Rs 10 lakh, whereas senior management may be assigned an SA of Rs 1 crore. For accident and life insurance, insurers may mandate that the assigned SA should not exceed 10 times a person’s CTC.

Linking the SA to a person’s CTC is most common for life and accident insurance. Companies typically fix a certain multiple between 1 and 10 times the salary. The SA then is directly proportionate to the individual salary. The important thing is for the company to update the salary and SA with the insurer whenever there is a change, especially at the time of appraisals.

Generally, the accident and life insurance policy is less visible to the employee, as it is not utilised in the usual course. However, it is incumbent on the employee to check with the HR department that the SA is updated whenever a salary change occurs; else their nominee(s) would find it hard to fight for the right SA when the need arises.

Another variant of the salary-linked SA is to limit the SA to certain pay bands. Herein, instead of linking the SA to actual salary, the company may choose to classify all employees into a pay band and assign a median SA to all those who fall in that pay band.

For example, employees with salary up to Rs 10 lakh could be classified as pay band 1. Employees with salary between Rs 10 lakh and Rs 20 lakh could be pay band 2, and so on. The company may choose a median pay of Rs 6 lakh for pay band 1 and Rs 15 lakh for pay band 2.

All employees within pay band 1 will then get an assured SA, based on the salary multiple of Rs 6 lakh. In such cases, the number of revisions required by the company would be lesser. Also, the company would then not need to disclose the actual salary of each employee to the insurer.

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Higher life and accident covers for larger families

A third option to differentiate benefits could be based on family size. This is more commonly used for health insurance, rather than accident and life insurance.

Companies may choose to provide a higher SA to employees with larger family size. For example, an unmarried employee may be given an SA of Rs 2 lakh, married employee without children may be given an SA of Rs 3 lakh, and married with one child may be given an SA of Rs 4 lakh.

The rationale here is that the larger the family size, the more the health-care need. This also takes care of the life stage of the employee, and to some extent the age. The average age of employees who are married with children would be higher than those who are unmarried.

At an older age, the propensity to fall ill is higher and that’s why a higher SA is justified. Though rare, in a few cases, employers may use a combination of the above criteria to segment the benefits. For example, while the SA in group personal accident and group term life could be a multiple of the salary, the multiple itself could be determined based on the family size or designation of the employee.

For unmarried or field-level employees, the multiple could be 2, whereas for married or supervisor-level staff, the multiple could be 3, and so on. In such a method, the SA distribution can be considered to be more equitable. These are determined based on the person’s need, yet with a common basis across all employees.

Keep your current designation, family status updated

However, the drawback of such a method is that it is administrative-intensive. HR and employees would always need to keep the designation or family status updated. Any change in this, along with the salary, would need to be updated with the insurer.

Other than the criteria for grade-wise changes, it is important for the employee to understand the basis of calculation of the SA. For example, if the SA is based on salary multiple, then it is important to understand the various components of salary which are considered. Companies are known to consider the full CTC, including variable salary.

Some employers may only consider the fixed salary, while others may consider only the basic salary component of the fixed salary. Employees should also know the conditions put forward by the insurer for the employee to become eligible for the full SA.

In group life insurance, insurers require the employee to go through a medical examination where the SA crosses a particular threshold. If the employee does not fulfil this requirement, then the SA is not fully approved.
The insurance amount considered in CTC letters are steadily increasing.