Body blow to group disability benefits
Employers cut back on benefits you may need should you fall ill
Many employers and retirement fund trustees are reducing disability benefits on employee benefit schemes, leaving you potentially underinsured or faced with taking out often more expensive additional cover in your own name.
The changes employees face now are largely a result of a sharp increase in claims resulting from the economic downturn that began in 2016.
Statistics prepared by True South Actuaries for the Association of Savings & Investment South Africa show an increase of more than 32% in claims on group life and disability policies for the year to June last year.
Peter Temple, the regional director for the UK, Ireland and South Africa for reinsurer Gen Re, says after the increase in 2016, claims across life assurers stabilised last year but at a higher level that has continued into this year.
Temple, basing his view on claims data for all major life assurers and some smaller players, says many large assurers have in recent financial statements noted losses on group disability policies.
All the assurers have or are in the process of increasing their premiums for disability cover, particularly those that provide a monthly income benefit, where premium increases have been between 30% and 40%, he says.
Jack van Zyl, a senior medical adviser at Sanlam Employee Benefits, describes these high increases as "a calamity" that could have repercussions for you if you fall ill or are disabled.
Karen Louw, Old Mutual's head of group assurance product development, says some group income-protection premium increases have been as high as 50%, but, on average, the increases in premiums since 2016 have ranged between 25% and 40%.
The increase in premiums on group disability policies
Van Zyl says some life assurers initially absorbed the costs of the rising claims for fear of losing business in a competitive industry. But now premium increases are forcing employers and trustees to choose between higher costs and lower benefits.
If your employer or trustees decided to contain the costs by reducing the cover you enjoy, you must check what effect this will have on the income you will derive from the group scheme and your individual life policies should you be disabled or severely ill.
For example, your scheme may reduce the percentage of your salary paid as an income-protection benefit.
Alternatively, if your disability benefit is a lump sum equal to, for example, seven times your annual salary, and this reduces to, for example, five times, this sum will provide a smaller percentage of your current income on disability.
In 2010, Gen Re actuaries Paul Lewis and Karl Schriek presented a paper to the International Congress of Actuaries showing how disability claims increase during times of economic hardship.
Questions to ask about group disability benefits
1. Do you enjoy an income protection benefit or lump-sum cover, or both?
2. If you have an income-protection benefit:
lAt what salary level does the income-protection benefit pay, and is it based on cost-to-company or pensionable salary?
lFor how long does the benefit pay?
lWhat is the waiting period before the benefit pays?
lAt what level does the income increase when you start claiming?
lDoes the benefit pay if you are not able to do your own job, or not able to do a job similar to yours, or any job?
3. If you have a lump-sum benefit:
- How is the lump-sum benefit calculated?
- If it is based on salary, is it based on cost-to-company or pensionable salary?
- Does the benefit pay if you are not able to do your own job or not able to do a job similar to yours, or any job?
- Does the disability benefit accelerate the life benefit - that is, does the life benefit reduce if you claim the disability benefit?
- After settling your debts, what monthly income could the lump-sum benefit buy?
Economic downturns have a particularly nasty effect on monthly income-protection cover provided through group schemes.
When times are tough, people who might ordinarily continue working with a condition that may qualify them for a disability benefit choose not to work, Temple says.
Employers also encourage those who are working at less than full capacity to claim for disability benefits rather than retrenching them, he says.
Sanlam Employee Benefits CEO Viresh Maharaj says disability income benefits provide necessary protection for most South Africans' largest asset - their future earning potential.
These benefits are particularly relevant for younger employees with their whole careers ahead of them and who require cover against the loss of decades of income should they become disabled.
Group life and disability benefits can be provided either through your retirement fund - known as approved benefits - or by your employer taking out what is known as an unapproved standalone benefit.
Typically, if your fund provides the benefits, part of the contributions your employer makes to the fund on your behalf may be used to buy the cover. If the premiums for this cover go up, less of the contributions made on your behalf will go towards your retirement savings.
Lumondt Kritzinger, the head of Old Mutual Group Assurance, says premiums paid for life and disability cover reduce the contribution available for retirement fund savings and there must be a balance between the level of protection and affordability.
Trustees of some funds set a limit on the portion of an employer contribution that will be used for group life and disability benefits. To keep within this limit, the trustees may choose to reduce the cover the fund buys for you rather than pay higher premiums.
Kritzinger says Old Mutual is giving employers and trustees more options when it comes to how to take the cover in an attempt to keep premiums affordable.
A common group disability benefit is that which provides income protection for up to two years, and if after two years you are unable to return to work, you may qualify for a lump-sum disability benefit.
Louw says Old Mutual has introduced a group income-protection benefit that pays an income for up to five years.
The policy should be used with one offering a lump-sum benefit that pays out if, after five years, an employee is still unable to work.
This benefit may be cheaper for your employer or fund than income protection that pays until your retirement age.
Old Mutual has also introduced a scaled benefit where income-protection benefits are set at 75% of the first R75000 of your annual salary, but drop to as low as 32% of your cost-to-company package for that part of your annual package that exceeds R200000 a year.
In addition to the economic downturn increasing claims on group disability schemes, in 2015 Income Tax Act changes took away the tax deductions for contributions for income protection and made the monthly payments tax free.
Jason Cooper-Williams, the head of business development at Gen Re, told the Actuarial Society of South Africa conference late last year that this boost to the ratio of income you can replace when claiming made it more attractive to claim on income-protection policies.
However, Temple says he believes that the full effect of the 2015 tax change will only affect insurers in future when claims on these policies are lodged.