The life insurance industry is full of technical language that makes it hard for the average person to understand what’s going on.
If you’re employed, you might have group risk benefits through your employer — the term ‘risk benefits’ is just another name for products like life insurance and disability or severe illness cover. Group life insurance benefits are interesting because they can be split into two categories: ‘Approved’ and ‘Unapproved’. Each is treated differently in terms of tax and how the benefits are paid out.
Here’s what you need to know.
What’s the difference?
Approved benefits are linked to a retirement fund. The retirement fund is the policyholder and has a contract with the insurance company providing the benefits.
Unapproved benefits are provided separately from a retirement fund. Your employer is the policyholder with the insurer.
Difference #1: tax
The term ‘Approved’ is derived from the ‘tax-approved’ nature of retirement funds. In other words, if you pay tax, you will get a tax deduction when you make contributions to a retirement fund. It’s the same with Approved benefits — because you pay your premium to the retirement fund itself, you might get a further tax deduction within SARS limits.
Here’s the flip side: If you pass away and the life cover is paid to your beneficiaries, the pay-out is taxed according to SARS’s retirement tax table. No other tax is paid after this, since lump sum benefits paid from approved funds are exempt from Estate Duty.
Unapproved benefits are different. Because they’re not linked to a retirement fund, your monthly premium is not tax-deductible. However, the lump sum benefit at death is paid out free of tax. Be aware of Estate Duty, though: this might be levied depending on who the benefit is paid to. If it’s paid to a spouse, then it’s exempt.
Difference #2: pay out
With Approved benefits, there’s a board of trustees for the fund in question, who decide how the death benefit gets paid out. The trustees typically have a duty to ensure that your dependents (as defined by the Pension Funds Act) are provided for first, but they also consider who you have nominated as your beneficiaries.
With Unapproved benefits, the board of trustees part doesn’t happen — the fund simply pays out to your nominated beneficiaries.
In either case, if you haven’t nominated any beneficiaries, the fund will pay out to your estate.
Knowledge is power
Dig out your employment contract and find out if you have group risk cover. Then contact your HR manager and ask if the cover is Approved or Unapproved. If you have Approved cover, you need to make sure the benefit amount (after tax) is sufficient to meet the needs of those you leave behind. If you have Unapproved cover and your nominated beneficiary is not your spouse, you need to consider the Estate Duty implications.
In both cases, it might be worth chatting to an independent financial advisor who can help with calculations and decision-making — and deciphering more jargon!