Tax changes see as­sur­ers cut­ting dis­abil­ity ben­e­fits

Life com­pa­nies are afraid that cer­tain tax changes im­ple­mented this year will mean you could get more than the stan­dard 75-per­cent in­come limit from a dis­abil­ity ben­e­fit pro­vided by your em­ployer. By in­tro­duc­ing a scaled ben­e­fit, how­ever, they risk the op

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

Life as­sur­ance com­pa­nies are in­tro­duc­ing tough scaled in­come lim­its on em­ployer-bought group life and dis­abil­ity cover, which could leave dis­abled peo­ple and their fam­i­lies se­ri­ously out of pocket.

The life com­pa­nies ar­gue that the re­duced ben­e­fits are jus­ti­fied be­cause of the “moral haz­ard” of peo­ple making fraud­u­lent claims in the be­lief that they will be bet­ter off than they would be while work­ing, or sim­ply be­cause they do not want to work.

The moral-haz­ard prin­ci­ple is that you should not be al­lowed to re­ceive more in dis­abil­ity in­come ben­e­fits than the in­come you re­ceived while work­ing. Un­til now, ben­e­fits paid by life com­pa­nies have gen­er­ally been lim­ited to 75 per­cent of in­come, with this limit ap­plied across all dis­abil­ity poli­cies you may own.

On March 1 this year, there were changes to how em­ployer- owned group life as­sur­ance ben­e­fits are taxed. Since then, many life as­sur­ers have re­duced the ben­e­fits even fur­ther, Saul Lee­man, the prin­ci­pal con­sul­tant at Alexan­der Forbes Con­sul­tants & Ac­tu­ar­ies, says. Now, scaled ben­e­fits are be­ing im­ple­mented, which means you could be se­ri­ously out of pocket if you are dis­abled and un­able to work.

You can re­ceive dis­abil­ity ben­e­fits from three sources: a pol­icy owned by your em­ployer (also called an “unap­proved” pol­icy), a pol­icy owned by your re­tire­ment fund (“ap­proved” pol­icy), or an in­di­vid­ual pol­icy you have bought di­rectly from a life as­surer.

Lee­man says the scaled ben­e­fits are, so far, be­ing ap­plied to unap­proved poli­cies only. He says that the scaled ben­e­fits:

◆ Do not af­fect ap­proved group life dis­abil­ity cover. The re­tire­ment fund pays you a ben­e­fit, nor­mally as a lump sum, which is de­ducted from any death ben­e­fit lump sum that your ben­e­fi­cia­ries would re­ceive if you died be­fore re­tire­ment age in terms of the rules of your fund.

◆ Do not af­fect dis­abil­ity cover that you buy as an in­di­vid­ual. This It is im­per­a­tive that you con­tin­u­ally check that you are ad­e­quately as­sured against the un­ex­pected, Saul Lee­man, the prin­ci­pal con­sul­tant at Alexan­der Forbes Con­sul­tants & Ac­tu­ar­ies, says.

Most South Africans do not have suf­fi­cient dis­abil­ity as­sur­ance, and an event such as a change to tax leg­is­la­tion can re­sult in fi­nan­cial hard­ship for you and your de­pen­dants, he says. He says it is im­por­tant that: ◆ You know what group risk ben­e­fits (for ex­am­ple, life, dis­abil­ity and fu­neral as­sur­ance) are pro­vided by your re­tire­ment fund or em­ployer. In par­tic­u­lar, you need to understand when you will be en­ti­tled to a ben­e­fit and how the ben­e­fit will be cal­cu­lated.

◆ Even if you are en­ti­tled to a group life ben­e­fit, you ac­cept that you will prob­a­bly have to buy ad­di­tional as­sur­ance. How­ever, you should en­sure that you are not over-as­sured against dis­abil­ity, be­cause this will re­sult in you pay­ing un­nec­es­sary pre­mi­ums.

◆ You re­ceive on­go­ing ad­vice about your fi­nances, of which dis­abil­ity as­sur­ance is only one com­po­nent. was con­firmed by Peter Dempsey, deputy chief ex­ec­u­tive of the in­dus­try body, the As­so­ci­a­tion for Sav­ings and In­vest­ment SA.

Lee­man, who spoke at a re­cent Alexan­der Forbes road­show for re­tire­ment fund trus­tees, says the cur­rent in­dus­try stan­dard across all types of in­come dis­abil­ity poli­cies is that you will re­ceive 75 per­cent of your pen­sion­able earn­ings when you are de­clared dis­abled.

There can be fur­ther lim­i­ta­tions. For ex­am­ple, you may need to buy cover above the free cover limit (the amount you can be cov­ered for with­out the need for a med­i­cal check-up), in which case you may be re­quired to pro­vide suit­able med­i­cal ev­i­dence to the sat­is­fac­tion of the as­surer.


If you are dis­abled, the amount you re­ceive will also be af­fected by how your work­ing in­come is de­fined in the pol­icy. It could be 75 per­cent of your gross in­come or you may be lim­ited to 75 per­cent of your pen­sion­able in­come.

Pen­sion­able in­come is nor­mally your ba­sic monthly salary (ex­clud­ing all al­lowances, bonuses, com­mis­sions), on which your and your em­ployer’s con­tri­bu­tions to your re­tire­ment fund are based.

Lee­man says that, on av­er­age, pen­sion­able in­come is about 70 to 75 per­cent of to­tal guar­an­teed pay. The gap can be greater if you re­ceive a 13th cheque and this is not pen­sion­able.

Lee­man says there are sig­nif­i­cant dif­fer­ences in how as­sur­ance com­pa­nies de­cide what your in­come is as the ba­sis to cal­cu­late the per­cent­age ben­e­fit on dis­abil­ity cover.

“So what the dis­abled per­son re­ceives is very much less than 75 per­cent of their to­tal in­come,” Lee­man says.

He says that life com­pa­nies have re­vised the caps they place on dis­abil­ity in­come ben­e­fits fol­low­ing the tax­a­tion changes on pre­mi­ums and ben­e­fits in the Tax­a­tion Laws Amend­ment Act of 2014, which be­came ef­fec­tive on March 1.

In terms of the changes, any pre­mi­ums paid by your em­ployer for an “em­ployer-owned” dis­abil­ity ben­e­fit must be in­cluded in your tax­able in­come as a fringe ben­e­fit. How­ever, if you claim a ben­e­fit, you will not be taxed on what is paid to you.

Lee­man says the ef­fect of the change is two-fold:

◆ If your em­ployer is pay­ing the pre­mium on the group dis­abil­ity pol­icy, your in­come will have in­creased on March 1 by the amount of the pre­mium. How­ever, this ex­tra amount will be taxed, re­duc­ing your take-home pay.

◆ If you are dis­abled, you will re­ceive a higher monthly in­come ben­e­fit than you would have re­ceived be­fore March 1, as you will no longer pay tax on the ben­e­fit.

Lee­man says th­ese tax changes led to the life as­sur­ance com­pa­nies also chang­ing the “moral haz­ard” lim­its on dis­abil­ity in­come ben­e­fits. One of the main changes has been the in­tro­duc­tion of sliding scales on in­come ben­e­fits. Th­ese sliding scales can have a se­vere im­pact on a dis­abled per­son’s in­come, par­tic­u­larly when the ben­e­fit is based on pen­sion­able and not guar­an­teed to­tal in­come.


Lee­man says the life com­pa­nies have raised the “moral haz­ard” is­sue to jus­tify the changes. How­ever, he says he doubts whether the “moral haz­ard” risk would ma­te­ri­alise as a re­sult of the tax changes.

A sim­i­lar pre-emp­tive ap­proach was taken to deal­ing with HIV/Aids, which was soon found to be un­jus­ti­fied, he says. The con­se­quence was that, over the next decade, pre­mi­ums, on av­er­age, de­clined, be­cause the im­pact of HIV/ Aids- re­lated claims was nowhere near what was an­tic­i­pated.

Lee­man says Alexan­der Forbes agrees that your dis­abil­ity ben­e­fit should be linked to your af­ter-tax Your monthly in­come could fall if you are dis­abled and you rely on a group in­come dis­abil­ity pol­icy based on a sliding scale of ben­e­fits.

Saul Lee­man, the prin­ci­pal con­sul­tant at Alexan­der Forbes Con­sul­tants & Ac­tu­ar­ies, says a typ­i­cal sliding-scale ben­e­fit be­ing ap­plied by life com­pa­nies is that you re­ceive 75 per­cent of the first R7 000 of your af­ter-tax pay, 60 per­cent for the next R20 000 and 50 per­cent of any ad­di­tional amount.

Lee­man says the im­pact can be seen in the fol­low­ing ex­am­ple:

Joe earns a to­tal guar­an­teed pay pack­age of R40 000 a month, with af­ter-tax take-home pay of R30 000. His pen­sion­able salary is R28 000 (ba­sic monthly salary, ex­clud­ing al­lowances, bonuses and com­mis­sions), on which his and his em­ployer’s con­tri­bu­tions to his re­tire­ment fund are based.

If Joe be­comes dis­abled, his in­come per­mu­ta­tions are:

◆ If he was dis­abled be­fore March 1, 2015, he would re­ceive a salary and should not leave you bet­ter-off than when you were work­ing. How­ever, the view of Alexan­der Forbes is that the ben­e­fit should not be re­duced to pre-empt a sup­posed “moral haz­ard”.

This does not mean that dis­abil­ity in­come ben­e­fits should not be re­viewed, Lee­man says. He says that, in re­al­ity, all South Africans are un­der-as­sured for dis­abil­ity.

In 2013 True South Ac­tu­ar­ies and Con­sul­tants found that when the im­pact of the loss or dis­able­ment of a bread­win­ner was mea­sured, South Africans were un­der- as­sured against death by R9.3 tril­lion and against dis­abil­ity by R14.7 tril­lion.

The fact that group dis­abil­ity in­come ben­e­fits are based on pen­sion­able salaries rather than to­tal guar­an­teed re­mu­ner­a­tion pack­ages, con­trib­utes to short­falls in dis­abil­ity cover.

Lee­man says the de­ter­mi­na­tion of salary for ben­e­fit pur­poses should “take into ac­count the re­mu­ner­a­tion struc­ture – namely, ba­sic pay plus other pay pack­age ben­e­fits, or to­tal cost to com­pany, or com­mis­sion earn­ings.” ben­e­fit of 75 per­cent of his pen­sion­able salary, or R21 000, from which R4 200 would be de­ducted in tax, leav­ing him with an in­come of R16 800. This is only 56 per­cent of his take-home pay of R30 000. (Note: tax de­duc­tions for things such as med­i­cal ex­penses have not been taken into ac­count.)

◆ If Joe was dis­abled af­ter March 1 and re­ceived 75 per­cent of his pen­sion­able salary, or R21 000, no tax would be de­ducted. This is 70 per­cent of his take-home pay.

◆ If he was dis­abled af­ter March 1 and the sliding-scale ben­e­fit was ap­plied to his pen­sion­able salary, Joe would re­ceive R17 750, which would be un­taxed. This is 59 per­cent of his take-home pay.

◆ If Joe was dis­abled af­ter March 1 and the sliding-scale ben­e­fit was ap­plied to his to­tal guar­an­teed pay pack­age, he would re­ceive R18 750, which would be un­taxed. This is 62.5 per­cent of Joe’s take­home pay.

He says employees have be­come used to liv­ing off the ad­di­tional pay­pack­age ben­e­fits they re­ceive above ba­sic pen­sion­able pay.

The re­duc­tion of in­come, if you are dis­abled, will have a sig­nif­i­cant im­pact on your abil­ity to main­tain your life­style, par­tic­u­larly tak­ing ac­count that you are likely to have much higher med­i­cal costs.

Lee­man warns that life com­pa­nies, em­ploy­ers and re­tire­ment fund trus­tees could find them­selves li­able un­der the Treat­ing Cus­tomers Fairly (TCF) reg­u­la­tory regime. In terms of the TCF prin­ci­ples, it is im­por­tant to con­sider the im­pact of dis­abil­ity in­come as­sur­ance on all re­tire­ment fund mem­bers.

“Clear com­mu­ni­ca­tion and ex­pec­ta­tion man­age­ment of ben­e­fits is re­quired in terms of TCF, as mem­bers are ex­posed to a fi­nan­cial plan­ning risk if they do not fully understand the im­pli­ca­tions and what they are ac­tu­ally cov­ered for.”

Em­ploy­ment con­tracts and hu­man re­sources prac­tices should be re­viewed to en­sure that the as­sur­ance ben­e­fits are prop­erly aligned, Lee­man says.

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