Compulsory Insurance for Gratuity Benefits

Can someone help me to under how a Group Gratuity Benefits Insurance works? and what are benefits we can expect from this as an employer.

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Hi,
Having Group Gratuity Insurance is one of the best decision an employer can take.

Insurance Companies of India offer their Group Gratuity Cash Scheme/ Fund to enable employers to meet their gratuity liability in a very simple and efficient manner. The scheme is formulated in compliance with Part C of the IV schedule of Income Tax Act and tax benefits are available as provided in Income Tax rules

The gratuity arrangement provides the following services to the company:

  • Fund management under interest accumulation system
  • Claim settlement on exit as per company rules/gratuity act
  • Built in Insurance arrangement for the employees for future service
  • MIS related to Income Tax and trusts accounts and Actuarial valuation

Fund management: Critical issues

Safety:

Liability on account of gratuity experiences sharp increase every year due to its nature of its computation. Apart from increase in service, increase in salary also contributes to increase in liability substantially as the benefits are payable on last drawn salary. Hence funds have to be invested in a conservative way with a consistent growth and insulated from market risks

Liquidity:

Funds available with insurance company are generally put in a single account for investment and claim settlement. Hence 100% liquidity is ensured for the purpose of claim settlement

Yield:

Insurance companies have been offering very competitive and consistent interest rates over the years. For the year 2009-10, on an average the insurance companies have offered 9.00% - 9.65% depending on fund size. The interest declared is net of administrative expenses incurred, hence no separate charges are charged after crediting the interest.

Interest rate offered is on daily balancing method. Hence, there is no idle time for earning interest, hence effective rate of interest is much higher. Another significant aspect is interest gets compounded annually, hence no reinvestment issues and no time lags.

No responsibility on trustees on Investment decisions:

Trustees are free from all investment risks and hassles in cash accumulation system. Advantage of ‘real outsourcing’ can be derived by associating with insurance companies.

No hidden charges:

The scheme is focused on a long term association in compliance with investment regulations and statutory payment obligations and no charges are levied on the transactions for which the fund is meant for.

Funding can also be in a staggered pattern during the year, but no charges at entry level for any number of payments. No charges on withdrawals for resignation or retirement or death. Total corpus comprising of money contributed by the company and interest credited by insurance company is available for claim settlement up to 100% subject to availability of funds.

Actuarial recommendations:

On annual basis, insurance companies provide this information to the trustees and recommend the level of contributions.

Claim settlement:

On the exit of an employee due to retirement / death/ resignation, trust may prefer a claim from the insurance company by sending a claim form. Claim amount will be made available to trustees. Trustees can have the following options

  • Preferring a claim from insurance company and paying to employee
  • Paying the money to employees and seek reimbursement
  • Paying claims to employees at their end and seeking annual reimbursement

MIS:

Insurance company provides statement of receipts and payments and actuarial valuation certificate and certificate of balance for the trust account.

Besides the above said advantages, the scheme also provides for employee welfare measures with built in insurance cover.

  • Insurance cover for future service gratuity

Another salient feature of the Gratuity Scheme with insurance companies is that they provide for insurance coverage to the employees to the tune of future service gratuity subject to certain limits. The insurance cover can be flexible depending on the requirements of the Trust. The Group Insurance premium will be commensurate to the cover provided.

  • Income Tax Benefit on Insurance Premium

The insurance premium paid towards the above said benefits is treated as deductible business expenses to the company.

The premium is not treated as perks in the hands of the employees

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With the increase in the number of people employed the organization is more responsible for the
society, its liquidity needs for the core business grow as well. For such a growing organization, financial and legal responsibilities also grow with the size. In our country (India) law has mandated certain financial obligations on the organizations with a sufficient number of employees. Gratuity is one such responsibility that allows an employee, staying in the organization for a longer duration, to be awarded and makes the employer liable to bear the cost of the award.

What is Gratuity?

All of us must be aware of the term Gratuity. Gratuity is a mandatory advantage to be offered to workers according to the Gratuity Act, 1972. It is a lump sum figure paid out to the worker at the time he/she is separating from the organization. An employee is entitled to the amount of gratuity only if he or she accomplishes the conditions mentioned in the Gratuity Act.

The function of the Policy

An organization can opt to save a sum of money with the intention of fulfilling the expected gratuity accountability. The pooled money formed under this scheme is then utilized to make claim payments for gratuity when employees leave.
An organization is liable to offer their workers the gratuity advantages. Every company needs to have sufficient funds to fulfill the gratuity needs of its employees at the right time.

Group Gratuity Insurance Plans

According to the law, an employer is liable to manage the gratuity funds and to pay to the leaving employee at the perfect time. However, in this ever-changing world, it is not necessary that a company always has extra funds to pay whenever asked to, which is usually difficult given the liquidity needs of the business itself. Therefore, it is advisable to go for a Group Gratuity Insurance Plan to take care of the sudden gratuity liability of the organization.

Benefits of the plan

A group gratuity insurance plan will not only help reduce the burden of sudden gratuity liability towards an employee but will also offer other benefits. The organization earns interest on the money deposited under the scheme and can avail tax exemption as well on the money invested.

Profits and Long-Term Investment Benefits

Gratuity savings can be parked in market-linked plans, which allows capital growth with relative safety. High capital growth has two benefits in the long run: one, your future premium obligation will be lower; and two, you can reward your valuable employees better.
All these benefits make the group gratuity insurance plan a preferred option to take up. It will enable an organization to fulfill the needs of the employee without putting added stress on the company funds. Also, not a lot of money is required to be paid to maintain the insurance policy.

Insurance providers now days have started coming up with newer Insurance plans that provide some additional benefits as well. These plans are not very expensive but offer additional benefits. However, it is advisable to do comprehensive research before picking up anything it will be for a large group of people and can affect the reputation of the organization positively or negatively in the future. So, you should take care of the advantages of all that are involved.

The best part is that all the information regarding these plans is available online. Thorough research can help you to get a better idea of all the plans. SecureNow offers a wide variety of insurance policies along with additional benefits like 24×7 chat support, easy processing, etc.
However, while getting any plan processed you should take care of some of the important things like:

  1. Proper paperwork: Since the group insurance scheme involves a large number of people related and unrelated directly to the business, the law becomes a party to the agreement. Thus, extensive paperwork may be needed by the insurer to fulfill the criteria for the insurance and also complete the risk assessment of the organization. Any discrepancy in papers may lead to rejection of claims later and a loss to the organization.
  2. Timely Premium Payment: Timely premium payment will keep the policy in force, and the organization covered at all times for gratuity liability.
  3. Falsification: Insurance contracts are based on the principle of ‘utmost good faith’; i.e. insurer believes every information the organization provides and vice versa. Any false information provided at the time of signing the contract allows the insurer to deny the claim or even cancel the policy.
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