From March 1, 2015, a change to the Income Tax Act will alter the tax treatment of income protection policies in South Africa. Currently, premiums are tax-deductible, with income benefits subject to income tax. Following the amendment, premiums will no longer be tax-deductible, but income benefits will be free of tax.
For people currently insured through income protection policies, the taxation change will lead to higher levels of income in disability, which will help to close the insurance gap. A study commissioned by the Association for Savings and Investment South Africa (Asisa) calculated the gap between death and disability insurance needed and the actual cover taken out by South African income earners. The overall death insurance gap was ZAR 9.2 trillion, while that for disability was ZAR 14.7 trillion. This means that South Africans are under-insured by about 61% for death and 62% for disability.
The root of insufficient disability benefits lies with the method employers use to determine contributions and benefit levels. Disability income benefits are usually defined as 75% of pensionable or risk salary, which is typically 80% of total cost to company salary. A disability claimant will thus receive 60% (i.e. 75% of 80%) of their total cost to company salary as disability income, with this amount currently further taxed as income. This replacement ratio leads to payouts that are often insufficient to meet disabled claimants’ needs, and may mean forced lifestyle changes.
With income benefits no longer taxed in the new fiscal year, disability claimants will receive more cash in hand than previously. For claimants with higher marginal tax rates, this amount will be far closer to their pre-disability monthly income. The taxation change offers an opportunity for policyholders to maintain their current cover levels and become more adequately insured to meet their post-disability income needs, with increased overall financial wellness.
The flip side of the coin
On the other hand, higher replacement ratios may reduce the incentive for disability claimants to return to work. It is expected that there will be more claims submitted and consequently more claims approved. The duration of income claims is also likely to increase, particularly for claim causes where the diagnosis regarding health and recovery is less objective. These include some leading claim causes such as psychiatric and spinal problems, and certain symptoms relating to musculoskeletal conditions.
In these circumstances, an integrated approach shared by the employer, employee, broker, insurer and medical scheme will be invaluable. The ability of the insurer to engage directly with employees as soon as a risk is identified is key for effective intervention and the optimal management of risk, claims and potential fraud.
Proactive disability management through an online portal
In light of these regulatory changes and in order for Momentum to make the disability claims procedure and assessment process more transparent and accessible to clients, Momentum has launched another exciting innovation: the new Wellness Care Centre. Since financial wellness is important to Momentum, claiming for disability should be a simple, clear and easily managed process.
This comprehensive online resource centre is available for potential and existing disability claims. The aim is to assist brokers, employers and employees to understand the income disability claims process. Momentum’s Wellness Care Centre is made up of a multi-disciplinary team of professionals with medical, functional and underwriting skills. The team performs holistic disability claims assessment and management services in accordance with the provisions and definitions of the policy, and legislation such as the Labour Relations Act, 1995, and Employment Equity Act, 1998.
Momentum believes in proactive disability intervention, and offers a unique approach to rehabilitation that extends from the interaction between specialists and claimants, through to reskilling, training and placement. Practical interventions make managing sick leave, rehabilitation, retraining and reskilling of staff as uncomplicated as possible.
We have an extensive network of market-leading medical professionals who are trained to provide objective information and facilitate the assessment and management of the claims process. Responding to the regulatory change, Momentum will continue to create a co-operative environment that supports the swift payment of valid claims and rehabilitation, and encourages claimants to return to work.