Approved versus unapproved cover: What’s the difference?

Group risk cover is provided by employers to their employees in the form of life and disability cover that forms part of their employee benefits package. As a result of risk pooling, economies of scale, and group underwriting, cover provided through group policies tends to be more cost-effective and beneficial to the employees, especially where pre-existing conditions would otherwise preclude employees from obtaining cover. The fact that group risk cover can either be ‘approved’ or ‘unapproved’ often creates confusion, with many perceiving ‘unapproved’ cover to have nefarious connotations, although this is not the case – with the differences essentially being how the premiums and benefits are taxed, and the manner in which they are paid out.

Approved group life cover is provided as part of a tax-approved pension or provident fund meaning that the employer’s retirement fund is duly registered with the Financial Sector Conduct Authority and is approved by the SARS Commissioner. The group risk cover in such circumstances forms part of the fund and is not a standalone insurance policy. The policy is in fact owned by the retirement fund and the premiums are paid by the fund meaning that there are usually no fringe benefit tax consequences for the employees. All employer and employee contributions to the retirement fund, including the portion that goes towards group risk cover, are tax deductible up to 27.5% of your taxable earnings, up to a maximum of R350 000 per year.

On the death of an employee, the proceeds of the approved life cover form part of the employee’s full death benefit and will therefore be distributed amongst his/her financial dependants in terms of Section 37C of the Pension Funds Act. The total lump sum paid out by the fund will therefore be a combination of the retirement fund credit and the life cover amount. This means that, while you may have nominated beneficiaries on your group risk policy, the fund trustees will use the nominations as a guide when determining who was either partially or wholly financially dependent on the employee at the time of his/her death. The proceeds do not form part of the deceased employee’s estate although they will be subject to tax as per the retirement tax tables, with any applicable tax being paid in the hands of the deceased employee in accordance with their retirement fund withdrawal history. It is therefore important to appreciate that approved life cover can have estate planning consequences in that your nominated beneficiaries may not necessarily be the recipients of the fund proceeds. Further, the Section 37C process can take up to twelve months for the fund trustees to finalise and it may therefore be necessary to make alternative arrangements for your loved ones to have access to cash in the immediate aftermath of your death. When receiving death benefits from an approved fund, the employee’s beneficiaries have the option to take the benefit in cash (subject to the retirement withdrawal tables), as an annuity, or a combination of both.

If an employee becomes permanently disabled, he/she will need to take ill-health retirement from the fund and leave the fund. In doing so, the proceeds of the disability benefit will be lumped together with the retirement benefits and may be used to purchase an annuity income, subject to the withdrawal rules, or be included in a preservation of the retirement fund until a future date.

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 absolutely 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.

  Approved Cover Unapproved Cover
Nature of policy Forms part of approved retirement fund Group risk is a separate policy from the retirement fund
Premiums Premiums paid by retirement fund Premiums paid by employer and added to employee’s income as taxable fringe benefit
Tax deductibility Premiums are tax deductible up to 27.5% of annual (capped at R350 000 per year) Premiums are not tax deductible
Tax No fringe tax consequences Taxed as a fringe benefit in employee’s hands
Death benefit Proceeds of life cover are added to the retirement fund benefit to form total death benefit Life cover proceeds are standalone benefits (i.e. separate from retirement death benefits)
Benefit distribution Death benefits distributed in terms of Section 37C of the Pension Funds Act Proceeds of life cover are paid to the nominated beneficiaries by the insurer (or to the estate where no beneficiaries have been nominated)
Timeline Can to up to twelve months to complete Payable on receipt of death certificate, completed claim form and all other supporting documents
Estate duty implications Retirement fund benefits do not form part of the estate and therefore do not attract estate duty Proceeds of life cover are considered a deemed asset in the deceased’s estate but may qualify for a Section 4(q) deduction where the surviving spouse is the nominated beneficiary
Tax on proceeds Lump sum benefit is taxed in the hands of the deceased’s estate as per the retirement tax tables No tax payable other than potential estate expenses if paid into the estate

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