By: Erin White
Group risk cover is an employee benefit provided by employers, typically including life and disability cover. Due to risk pooling, economies of scale, and group underwriting, these policies are generally more affordable and advantageous, particularly for employees with pre-existing conditions that might limit individual coverage.
Confusion often arises around the terms "approved" and "unapproved" cover. Despite misconceptions, "unapproved" cover is not negative; the distinction lies in how premiums and benefits are taxed and paid out. Understanding these differences is important for employees to fully appreciate the benefits of group risk cover within their employment package.
Approved group life cover is offered through a tax-approved pension or provident fund, meaning the employer’s retirement fund is registered with the Financial Sector Conduct Authority and approved by the Sars Commissioner. In this case, group risk cover is part of the retirement fund rather than a separate insurance policy. The fund owns the policy, and premiums are paid by the fund, so employees generally do not face fringe benefit tax implications. Both employer and employee contributions, including those allocated to group risk cover, are tax-deductible, up to 27.5% of taxable income, with a maximum annual limit of R350,000.
Upon the death of an employee, the proceeds from approved group life cover are included in the employee’s total death benefit and distributed according to Section 37C of the Pension Funds Act. The lump sum paid by the fund consists of the employee’s retirement fund credit and the life cover amount. Although the employee may have nominated beneficiaries, the fund trustees use these nominations as a guide to determine who was financially dependent on the employee at the time of death. The proceeds do not form part of the deceased’s estate, but they are subject to tax according to the retirement tax tables. Any applicable tax is paid based on the deceased employee’s retirement fund withdrawal history.
It is important to understand that approved life cover may affect estate planning, as your nominated beneficiaries might not receive the fund proceeds directly. The Section 37C process, used by fund trustees to distribute benefits, can take up to twelve months, so alternative financial arrangements may be needed for your loved ones to access cash immediately after your death. When beneficiaries receive death benefits from an approved fund, they can choose to take the benefit as a lump sum (subject to tax), an annuity, or a combination of both.
On the other hand, unapproved group risk cover is a standalone insurance policy that is not linked to the employer’s retirement fund. The word ‘unapproved’ essentially means that the benefit is not offered through a tax-approved retirement fund and in no way affects the legitimacy of the cover.
Where the employer pays some or all of the premiums, the employer can claim these costs as tax-deductible expenses although the amount must be added to the employee’s income and taxed as a fringe benefit. In the event of an employee’s death, the proceeds of the group life policy will be paid directly to the employee’s nominated beneficiaries or - where no beneficiaries have been nominated - directly to the employee’s deceased estate on a tax-free basis.
The retirement fund portion, on the other hand, will be distributed by the retirement fund trustees in accordance with Section 37C of the Pension Funds Act. Upon an employee’s death, the proceeds of the group life policy, as with a personal life insurance benefit, will be considered a deemed asset in the deceased’s estate and may therefore be taken into account when determining estate duty. Note, however, that where the benefit has been bequeathed to the employee’s surviving spouse it will qualify for a Section 4(q) deduction – meaning that the benefit amount will be excluded from the estate duty calculation.
Any disability, funeral, or dread disease cover paid to an employee from an unapproved policy will be free from tax. Typically, the income protection benefits in the case of a permanent disability will continue to pay out until the insured reaches age 60 or 65, depending on the terms of the policy and the normal retirement age of the fund.
Whether you enjoy approved or unapproved benefits through your employer, it is essential to ensure that your beneficiary nominations remain up to date. If you are a member of an approved fund, remember that your beneficiary nomination will be used as a guide by the fund trustees when making their determination regarding the distribution of your death benefits. If you are a member of an unapproved fund, keep in mind that you will need to complete two separate beneficiary nomination forms, namely (a) nominations in respect of your retirement fund benefits and (b) beneficiary nominations on the standalone life policy.
* White CFP® is a director at Crue Invest.
PERSONAL FINANCE