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Employee Benefits : Risk Benefits

Group Life Assurance Policies

These policies are long term insurance policies which provide benefits on the death of a member. They can be structured on an approved or unapproved basis.

Approved Group Life Assurance Policies

These policies are held in the name of the fund and are subject to the rules of the fund. In terms of Section 37 C of the Pension Funds Act, the trustees must determine who becomes entitled to the proceeds in terms of the rules.

The premiums are paid by the fund and usually from the employer’s contributions. The employer claims a Section 11(l) tax deduction.

The benefit is taxed on payout to the beneficiary and is taxed in terms of the Second Schedule to the Income Tax Act as if it had accrued to the member immediately prior to the member’s death. If the rules of the fund allow for a compulsory annuity to be paid (pension) the lump sum accrued can be paid across to an insurer tax-free but the full income received by the beneficiary will be taxed. Any lump sum taken by the beneficiary will form part of the estate of the deceased unless it is paid to the surviving spouse (Section 4Q).

There is no capital gains tax payable on lump sums received as they are not subject to tax Paragraph 54 of the 8th Schedule.

Unapproved Group Life Assurance Policies

Unapproved group life policies are owned by the employer and not the fund. They are a group of single life policies grouped together held by the employer. As the group life policy is unapproved the premiums are not tax deductible but the proceeds are tax free. The employer often pays the premiums on behalf of the employee and claims a deduction under Section 11(a) of the Income Tax Act, if the benefits in terms of the policy constitute a service agreement with the employee. In this instance the premium could be seen as a fringe benefit to the employee which could be taxable in terms of Paragraph 2(h) of the 7th Schedule.

These benefits do not form part of the retirement fund and are therefore not subject to section 37C.

Group Disability

Disability benefits provide cover for temporary or permanent incapacity resulting from injury or disease and are payable in a number of different ways. Benefits are provided in the form of an income benefit or a capital benefit and usually the income benefit stops at retirement.

These policies pay out benefits in the event of a disability claim if they meet the definition of disablement.

There are two broad definitions of disability used in the industry:
• Own occupation – which means the claimant is unable to perform their current profession or trade.

• Own or similar occupation – which means the claimant is unable to perform their current profession or trade or a reasonable alternative based on their experience and qualifications.

There are two types of disability policies available namely:
• Lump sum disability – these policies are also called capital disability policies and only pay the benefit out on total and permanent disability and are often seen as an accelerator of the death benefit. These policies can be contracted on an approved or unapproved basis. Where the approved lump sum disability policy is linked to an approved fund the benefit is paid out to the fund and the fund in turn would pay out the benefits to the member in terms of the rules of the fund, this could be in the form of a lump sum or an income. There are often exclusions for self-inflicted injuries and hazardous pursuits.

• Income disability – these policies are commonly referred to as permanent health insurance (PHI) and attempt to compensate the claimant for loss of earnings as a result of disablement. The disablement needs not be permanent and the policy provides the income to be paid for as long as the claim lasts but only up to normal retirement date. The claimant will have to provide the fund or employer with annual proof of continued disability.

The disability income benefit is calculated as a percentage of the pensionable salary and is usually 75% of the members salary.

Some policies provide for a 100% payout in the first two years. Most income policies have a waiting period before the policy starts to pay; this is normally a 90 day waiting period during which the employer often pays the salary.


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