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SA's No 1 Insurance Blog

“Could you pop around on Friday? I’d like you to explain how the Provident fund works to all my staff.”

Friday rolls around, I’m half an hour early and I’m ready to explain why they need a provident fund. In my mind, the biggest issue is explaining to the staff why they also need to contribute to the fund.

So I spent the better part of an hour explaining the benefits of a provident fund to the fifty (or so) people present. Everyone eventually gets it, even though some were less than enthusiastic about contributing to it. You can’t win em all, can you?

If you’re an employee and stepping on in age, you know how important it is to belong to a pension or provident fund.
Chances are when you hit sixty or sixty-five, there’s little chance of you staying on. Most firms will show you the door.
If it weren’t for that retirement fund most of us would be in a whole lot of trouble.

Everyone seemed quite happy with the ‘why’ around the provident fund until one chap decided to ask an awkward question:

What happens if you don’t make it to retirement?

I was three-quarters of the way through the discussion when the question came up. Truth is, the employer was still in two minds about offering it as a benefit. But it’s still a brilliant question. After all, it’s great saving for retirement, but what happens if you don’t make it that far?

Sure, if you’re single and without a care in the world, you might not worry about dying (Unless it’s about disability), but what if there’s a family or a parent to take care of?

I can tell you what happens.
They’ll be knocking at your employer’s door asking for money. Hopefully, your employer will have more than a week’s wages for them.

Most employers understand this which is why they have group life cover in place. The problem though is that life insurance is expensive. So…

How do you persuade an employer to pay for group life cover?

A couple of reasons, the main one being, because it’s cheap. Well, at least cheaper than buying individual life insurance.

To give you an example, we quoted on 104 staff:

  • male and female combined,
  • smoker and non-smoker combined,
  • Different incomes and different occupations combined

and the most expensive quote came in at R8, 000 (which is R77 a month per staff member).

I then asked one of the staff to provide me with his date of birth, and I prepared a quotation as a smoker taking out R300, 000 whole of life insurance – R199.50 per month is what it came to!

One of the reasons for the low cost has to do with the life insurance stopping at age 65. Individual life insurance, on the other hand, is costed for the whole of life. Regardless, it was cheaper than individual life insurance.

The second reason is that no medical tests are required.
Well, at least up to a point. A medical free limit is set and if an employee qualifies for more than this amount in life cover, a medical test then becomes a requirement.

What happens if the employee refuses to go for the medical?
Their cover is then restricted to the medical free amount and they pay an appropriate premium for this.

Now think for a moment of the HIV positive staff member who would pay a fortune for conventional life insurance? With Group Life Assurance they get the cover no questions asked.

The third reason is that it doesn’t discriminate against smokers.
On an individual life insurance policy, a non-smoker could pay a lot less for the same amount of cover. With group life assurance, the smoker benefits.

There is one problem with Group Life Assurance

It’s taxable.
When group life assurance is ‘approved’ it means two things:

  • The cost is deductible as an expense by the employer, and
  • The benefit is taxed in the hands of the employee

When a claim is submitted, the first R500, 000 of the claim amount is paid out tax-free. After that, the amount is taxed in different bands starting off at 18% and going all the way up to 36%.

One way to avoid the tax is by having the group life assurance ‘unapproved’. What this basically means is:

  • The cost is not claimed as an expense by the employer
  • The cost is added to the employee’s income as a taxable fringe benefit
  • The benefit is not taxed since the employee has already been taxed on the cost

Employees usually prefer the ‘approved’ option. Employers prefer it the other way around.

Who gets the money when a staff member dies?

A major concern amongst the staff was that the employer would get the money. We had to explain that the life insurance pays out to your nominated beneficiary and not to the company.

However, this doesn’t guarantee your nominated beneficiary will receive it.
That’s because the trustees of the provident fund are obligated to take care of all dependants – not just the one you happen to nominate.
So, if for instance, you were providing for an elderly parent whom you haven’t nominated as beneficiary, this parent is entitled to claim against the proceeds.


This doesn’t mean you shouldn’t buy individual life insurance at all.
Applying for life insurance at retirement is an expensive exercise and you want to make certain that you buy life insurance while still young and healthy.

Some retirement funds do offer a continuation option.
What this means is that they will offer you the equivalent cover at retirement without medical tests. The problem is you still need to purchase individual cover based on your age at retirement which might be too expensive.

One last thing to consider
You cannot rely on Group Life Assurance if you decide to change jobs. Not taking out individual life insurance because you have plenty of Group Life Assurance isn’t the wisest of decisions.

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