Publications
Partners
Johannesburg - South Africans are underinsured by about 60% for disability, according to a study by the Association for Savings and Investment South Africa (Asisa).
Amendments to the Income Tax Act, which take effect on March 1 2015, will alter the tax treatment of income disability and contribute to closing the current disability insurance gap in South Africa.
“Currently, premiums on income protection policies are tax-deductible, but income at claim stage is taxed," explained Brice Salence, head of insurance pricing and reinsurance for group risk at Momentum Employee Benefits.
"Following the amendment, premiums will no longer be tax-deductible, but income received will be tax-free; meaning claimants can expect a larger pay-out.”
The root of insufficient disability benefits lies with the method employers use to determine contributions.
Most calculate pensionable salary at 80% of total cost to company (TCT) salary. Working on the standard disability benefit of 75% of pensionable salary (that is 75% of 80% of your TCT), most employees end up with a 60% of the TCT benefit - in other words, a 60% replacement ratio.
This is generally insufficient to meet disabled claimants’ needs.
“Claimants with higher marginal tax rates will benefit the most from the amendment as tax-free income payments will align them more closely to their monthly income. Although individuals in lower and middle-income brackets will not benefit as much, some may already benefit from government grants,” said Salence.
Salence cautions that increased replacement ratios will force insurers to raise the costs of income replacement policies.
“Costs are derived through two main components: the likelihood of a policyholder becoming disabled and the expected duration that the claimant will receive income until they recover, die or retire,” explained Salence.
“Higher replacement ratios may reduce the incentive for disability claimants to return to work. We expect an increase in claims submitted and consequently more claims approved,” she said.
“We also anticipate that the duration of income claims will increase particularly for claim causes where the diagnosis of health and recovery is less objective. These include some leading claim causes such as psychiatry, spine and certain symptoms relating to musculoskeletal conditions."
The tax change presents an opportunity to somewhat close the insurance gap next year if clients accept price increases and do not reduce their cover. This will ensure that their insurance needs are met and thereby increasing their financial wellness, according to Salence.
