What is the difference between Approved & Unapproved Cover
Group risk benefits include life insurance, disability or severe illness cover and funeral benefits and these policies only pay-out in the event you pass away, or you are unable to work anymore, have a health shock, or you or someone in your family passes away. These benefits are divided into approved and unapproved risk benefits.
Approved and Unapproved benefit comparison:
1. An approved benefit:
It is provided by the fund and is paid out together with the member’s retirement savings in the fund. The policyholder will be known as the retirement fund. If the cover is provided within a pension or provident fund it will be referred to as an approved cover.
All contributions to approved funds are tax-deductible up to 27,5% of taxable income, capped at R350,000 per annum, but the benefit pay-out is subject to tax according to current tax legislation. Lump-sum pay-outs from approved group risk funds are not subject to estate duty.
With approved risk benefits there will be a board of trustees that will facilitate all claims and pay-outs. You will still be required to complete a nomination form when joining the Fund, or as and when your beneficiary details change; however, the trustees will ultimately decide on the distribution of your death benefits, by exercising their fiduciary duties under Section 37C of the Pension Funds Act, and after investigating your circumstances at death.
2. An unapproved or self-standing benefit:
It provided through an insurance policy issued to the employer and does not form part of the fund benefits. The unapproved cover simply means that it is not offered under a tax approved retirement fund and doesn’t affect its legitimacy in any way. If the cover is provided within a pension or provident fund and the income forms part of protection benefits than it will always be unapproved cover.
With unapproved group risk funds, contributions are not tax-deductible, and the benefit pay-out is tax-free, so in a way, you will still save on tax in the end. Unapproved death benefits are however included as deemed property in determining the estate duty liability. Any benefit bequeathed to a surviving spouse will qualify for a section 4(q) deduction which means that the benefit amount will be deducted before the final estate duty liability is determined. Disability, funeral and severe illness cover from unapproved group risk funds are paid tax-free to the member directly.
With an unapproved fund, your nomination form is seen as your last and final wish. Here, there are no trustees and the full death benefit will be paid out as instructed on the nomination form.