LEGAL UPDATE ISSUE 05

Treatment of Death Claims

Background
Where death benefits are insured via freestanding unapproved group risk schemes, insurance companies have of late started to strictly apply the specific policy wording and conditions when it comes to the payment of benefits.

This has led to the rejection of certain beneficiary nomination forms. The main reason for insurers rejecting these nomination forms is to limit any risk of claims against them following the payment of a claim as per the nomination form or payment advice received from the employer. Therefore the wording of a nomination form should be aligned with the wording and conditions of the policy for it to be acceptable for the insurer.

Example
Company A provides a pension fund for their employees and wishes to also offer death benefits via a freestanding unapproved risk policy. Being an unapproved policy, the employer cannot deduct premiums for tax purposes, however the benefits are tax-free when paid. The policy wording states that payment of benefits will take place in accordance with a nomination form or, in the absence of a nomination form, to the deceased employees’ estate. Employee X duly completes a nomination form. The nomination form wording only refers to the Fund’s benefits, i.e. the freestanding unapproved benefits are not covered in the nomination form.

The employee subsequently passes away and the claim is submitted to the insurer. The insurer then determines that the claim has to be paid into the estate of the individual. Why?

The reason for this is that a member’s fund credit and re-assurance benefit is paid according to Fund Rules and in terms of Section 37C of the Pension Funds Act, whereas freestanding unapproved group risk benefits are paid out in accordance with the policy conditions. Therefore, as the nomination form completed by employee X does not refer to the specific risk policy conditions, it cannot be accepted by the insurer for purposes of the payment of unapproved freestanding risk benefits.

Way forward
Where an employer implemented a freestanding unapproved risk policy to insure death benefits, it will be prudent to either:
• Complete two beneficiary nomination forms – one referring to the fund benefit and one specifically referring to the unapproved group risk benefit; or
• Adapt the standard nomination form to specifically cater for the nomination of both the Fund and risk benefits separately.

In addition, it will be prudent for an employer to have a careful look at their existing policy wording, especially in light of the fact that often a nomination form is not completed. Here the policy could make room for employer and or management committee / trustee discretion by amending the policy wording to this effect.

Please liaise with your Fund Consultants regarding the most suitable solution for your specific situation.

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