Unapproved group risk benefits payable to minor children
By Adel Grabe, Legal and Technical Specialist
Employers often split insured lump sum death benefits for their employees between a retirement fund and a separate group life scheme. If the cover is provided in terms of a tax-approved retirement fund, this is referred to as an “approved” scheme, and if provided under a separate group life insurance policy, outside the retirement fund, an “unapproved” scheme.
Schedule 2 of the Insurance Act sets out the different classes and sub-classes of insurance business that an insurer may conduct and describes how group life policies and funeral policies should be dealt with. It requires that payment of unapproved group life policies be made directly to beneficiaries in accordance with the deceased employee’s beneficiary nomination form. If an employee did not nominate beneficiaries to whom their unapproved group benefits should be paid, the benefits must be paid to the employee’s estate.
Since the amendment of the Insurance Act in 2018, the employer as the policyholder or a committee does not have the discretion to determine the beneficiaries under group life insurance policies anymore.
One of the sub-classes of life insurance business in Schedule 2 of the Insurance Act is “group death”, which is defined as “a lump sum or specified or determinable equal or unequal sums of money payable at specified intervals payable to a beneficiary on the happening of a death event”.
In respect of a group insurance policy, “beneficiary” is defined as a member of an association, or a fund or an employee or a person nominated by the member, which person is not the association, fund, or employer.
Therefore, an employer-held policy that provides death benefits to or in respect of its employees would fall within the definition of “group” and such benefit would need to be paid to a nominated beneficiary.
Considering the above, it is important that employees nominate to whom their group risk benefit should be paid. When it comes to nominating a minor child, it is particularly important that employees indicate how the minor child’s benefit should be dealt with.
When a benefit is payable to a minor (a child under the age of 18 years) insurers will typically pay the proceeds of the policy to the child’s natural guardian (mother/father) or to a legal guardian, in which case a High Court letter of appointment will be required. If there is no guardian, the benefit will be paid to the Guardian’s Fund.
The natural or court-appointed guardian may indicate whether the benefit must be paid into their bank account or into a trust or beneficiary fund.
The current constraints in the Insurance Act may cause delays in paying a child’s benefit due to the caregiver of a child having to obtain a High Court letter of appointment as legal guardian. The funds would also form part of the guardian’s estate once the minor’s benefit is paid to the guardian. Although the guardian may be well qualified to handle their own finances and may have the best intentions, if the benefit payout is not kept separate for the benefit of the minor, it might be integrated with the estate of the guardian. This factor becomes especially important in the event of the death or divorce of the guardian.
While the regulator’s intention to address potential abuse of power by removing the provision previously afforded to an employer to use its discretion in determining the beneficiaries to receive a payment for unapproved lump sum benefits is understood, the current situation calls for reconsideration and a solution for minor children’s benefits to be utilised and protected for their benefit.
Until such time, employers have the responsibility to educate and inform their employees of the potential impact should they not nominate beneficiaries for their unapproved risk benefits, and to highlight the importance of specifying who should manage minor children’s benefits until the children are mature enough to manage their own finances.
Read the article from FAnews Magazine-Online August 2024 edition