A common component in Cost to Company (CTC) of salaried employees is contribution to Employee Provident Fund. EPF contribution, mandatory for all companies with 20+ permanent employees, is enforced by Government of India under the EPF & MP Act 1952. Under the same Act, Government also mandates the employers, contributing to EPF, to provide life insurance cover to employees, via Employee Deposit Linked Insurance Scheme (EDLI).
Under EDLI scheme, employees are given life insurance cover. i.e., in the event of natural or accidental death of the insured employee, the beneficiary nominated by the employee is entitled to get lump sum money. For this, a small amount as insurance premium is contributed by the employer which employers include in the Cost to Company of employees.
Amount paid to PF for EDLI insurance = (0.5% X Basic salary of the employee)capped at Rs 6,500
While this scheme results in inevitable expense in the form of premiums, the benefits of this scheme are far greater.
The death benefit under EDLI scheme is calculated using the following two methods, and the higher value obtained by both the methods is the death benefit receivable as death benefit by the insured’s nominated beneficiary –
a) Method 1 – Using employee’s salary
Death Benefit1 = (Avg basic salary in 12 months preceding death)capped at Rs 6,500 X 20
b) Method 2 – Using PF balance
Death Benefit2 = Lower of (Avg PF balance in 12 months preceding death OR Avg PF balance during employment)capped at Rs 50,000 + 40% of (calculated Avg PF balance – Rs 50,000)
The maximum sum assured as death benefit under this scheme is Rs 1,30,000. Death benefit is calculated using both the above methods and higher value obtained is the final death benefit, capped at Rs 1,30,000.
Amar has Rs 5,000 basic salary till March 2013 and from April 2013 his basic salary increases to Rs 7,500. His Avg PF balance from Jan 2013 to Dec 2013 is Rs 60,000. His Avg PF balance during employment is Rs 55,000. On Amar’s death in January 2014, the following is how his company calculates his death benefit under EDLI:
Death Benefit1 = Rs (5,000 X 3 + Rs 7,500 X 9)/12 X 20 = Rs (6,875)capped at Rs 6,500 X 20
= Rs 6,500 X 20 = Rs 1,30,000
Death Benefit2 = Lower of (Rs 55,000 AND Rs 60,000)capped at Rs 50,000 + 40% of (calculated Avg PF balance – Rs 50,000)
= Rs 50,000 + 40% X (Rs 55,000 – Rs 50,000)
= Rs 50,000 + 40% X Rs 5,000 = Rs 52,000
Final Death Benefit payable to Amar = Higher of (Rs 1,30,000, Rs 52,000)capped at Rs 1,30,000
= Rs 1,30,000
While the maximum benefit under mandatory EDLI insurance is Rs 1,30,000, a company has the option to register for any other insurance scheme, in lieu of EDLI scheme, only if the death benefit in that scheme is higher than Rs 1,30,000. Therefore, if a company opts for another insurance scheme in lieu of EDLI, the minimum sum assured becomes Rs 1,30,000 and maximum may be anything offered under the insurance scheme.
Opting for a private company’s insurance scheme is more convenient and hassle free in terms of claims settlement. It means lesser payout in terms of premium payments as compared to EDLI payouts and provides better death benefits. Hence, companies these days prefer to opt for group insurance schemes floated by private insurance companies in lieu of EDLI.