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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 37c 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 employers
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.
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