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  FINANCIAL ADVISOR'S VIEW

Group life cover – ‘approved’ for who?

Breaking down the jargon to help you effectively plan financially.

As part of the “traditional” employee benefits offering, being retirement, medical and risk insurance, most employers provide life cover for employees, either on an approved or unapproved basis or a combination of the two. If you work with this sort of thing daily, understanding the difference between the two in terms of the way benefits are paid out, premiums charged and the associated tax implications of both, is not difficult…

However, when we communicate with employee groups, service providers tend to throw jargon of “approved” and “unapproved” into welcome guides and annual benefit statements together with high level terminology like “fund credit” and “net replacement ratio,” assuming the general working population understands exactly what we are talking about.

All too often, I believe that the norm is for service providers to issue communication saying that, for instance, the Financial Services Board PF 130 Circular requirements have been complied with. Instead of ensuring that the level of engagement is appropriate enough for employee groups to understand, this poses at least two negative consequences:

1. By providing benefit arrangements that are not understood or engaged with, the employer is essentially incurring unnecessary administration and costs for no return on their “investment” by way of:

  • Being able to attract and retain valuable talent; and
  • Adding value to employees and their families

Which is what any well-designed, appropriate employee benefits package should aim to do.

2. Employees are incurring costs for something that adds no value in their lives because they don’t ask the right questions on their benefits or even know the right questions to ask. I have seen it before where there is a legitimate disability claim, not claimed for because the affected employee and the employer’s very own HR department were unaware that the benefit even existed, although every month a premium was paid. Said employee now sits at home unable to generate an income where 75% of his or her monthly salary could have been paying out. This is an absolute tragedy.

Further to this, in many instances, in a Total Cost to Company (TCTC) remuneration structure, benefits are based on the notion of “pensionable salary” which is set by the fund as a certain percentage of TCTC usually in the region of 72% – 80%.

The net effect is a complete misunderstanding of the level of benefits and thus a complete inability to effectively plan financially. Communication therefore needs to be clear and simple to emphasise that one’s monthly retirement contribution percentage and life cover benefit is based on the percentage of TCTC, which is commonly referred to as “fund salary”.

Up until now, I’ve digressed from the title of this article in the interest of getting my point across around the severe implications of ineffective communication that is difficult to understand.

Assuming you are remunerated on a TCTC basis, if your employer provides group life cover on an approved and/or unapproved basis, this is what it means for you as an employee:

 

 

Approved Life Cover

Unapproved Life Cover

Monthly premium payment

Paid as part of retirement fund contributions. Also important that employees understand that only after this, and other fees are deducted. is their monthly contribution invested.

Monthly salary deduction.

Benefit payment

Paid out according to Section 37C of the Pension Funds Act which provides for allocation of your life cover in consideration of your factual and financial dependants.

 

 

In summary, think of it as follows:

 

Any person (whether family members or other) whom you support financially up until date of death, will be entitled to some part of your life cover per the extent of their dependency on you.

 

The beneficiary nomination form you fill out is essentially an expression of your wishes in terms of who is allocated all or part of your cover.

Paid out per the beneficiaries stated in the beneficiary nomination form of the insurer/employer.

 

You therefore nominate who will benefit from the life cover pay out.

Tax implications

The benefit is taxed on pay out together with any retirement savings at date of death, based on the retirement tax table applicable at that point in time.

 

Monthly premiums are deductible for tax purposes.

The benefit is tax-free on pay out.

 

 

 

 

 

Monthly premiums are not deductible for tax purposes.

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