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Category Life Insurance

How your death benefits will be distributed?

29 August 2019 Momentum Corporate

The main purpose of a retirement fund is simple: build up enough retirement savings during your working years so that you are able to continue living the lifestyle you have become accustomed to when you retire. Retirement planning is therefore the simple concept of planning financially for the day you retire. Life, however, does not always go as planned.

This is according to Nashalin Portrag, Head of FundsAtWork at Momentum Corporate, who says that it’s important for employees to understand what happens to their employer-provided retirement fund benefits in the event of their untimely passing. If an employee is a member of a retirement fund they will have a retirement savings account and these accumulated savings will be paid out to their nominees or beneficiaries when they die. Over-and-above the retirement savings, they may also have a lump sum death benefit, which will either be an approved or unapproved benefit.
The Pension Funds Act allows for the provision of lump sum death and disability benefits as approved benefits. These benefits can also be provided as unapproved benefits.

The differentiation between these two types of death benefits, however, is an area that Portrag says is often misunderstood by fund members. According to Momentum Corporate Research that was conducted on members’ understanding of terminology used across the employee benefits sector revealed that members are uncomfortable with these two terms.
“However, because different rules and regulations apply to the distribution and payment of the different benefits, it is important for members to distinguish which one they have and the implications this will have on how the lump sum is distributed to their nominees or beneficiaries,” says Portrag.

“In addition to the nominees and beneficiaries being different, there are also other differences between approved and unapproved benefits such as tax treatment. This differs depending on whether the benefit is offered through their retirement fund (approved benefits) and/or outside their retirement fund through a separate employer policy (unapproved benefits),” Portrag continues.
Click here for more on the differences between approved and unapproved benefits.


Approved lump sum death benefit
Portrag explains that an approved lump sum death benefit is provided through a retirement fund. “This means that the retirement fund is the policyholder and the same rules apply as for the retirement savings account balance.”
“When a member dies, the trustees of the retirement fund will therefore decide who will receive the benefits, what portion of the benefit they will receive, and how it should be paid, using the member’s beneficiary nomination form and the Pension Funds Act as a guideline. Firstly, their dependants will be considered, followed by their non-dependant nominees.”
Portrag adds that in the case of an approved benefit, an employer has no say over the distribution and payment of the benefit. “The trustees, however, can ask the employer for information during the decision-making process. It is important to note that the member’s wishes as stipulated in their will and testament cannot override the trustee’s decision in this regard.”

Unapproved lump sum death benefit
An unapproved benefit is provided outside of the retirement fund – and therefore isn’t subject to the Pension Funds Act. Also known as a stand-alone death benefit, an unapproved benefit is provided through an additional insurance policy that the employer took out for the members. “This means that the employer is the policyholder and must make sure that the member’s benefits are distributed according to the policy rules.

With unapproved benefit, the member’s beneficiary nomination form will be followed as long as it is in line with the policy rules, and the trustees have no say over the distribution and payment of this benefit,” says Portrag.
That said, as is the case for approved lump sum benefits, the member’s wishes as stipulated in their will and testament cannot override the policy rule. Portrag highlights the importance of beneficiary nomination forms, “This is why it’s important for members to ensure that if they have an employer-sponsored retirement fund, they fill out the beneficiary nomination form, where they nominate dependants and nominees. This will help guide the trustees or the employer with the distribution of the funds.
If members are unsure of which type of benefit they have, Portrag recommends that they check their benefit statements. If the employer has taken out stand-alone insurance benefits with another insurer, these benefits will not show on the members’ retirement fund benefit statement. In this case, they will need to get information about these benefits from their employer by consulting their Human Resources officer”.

It’s important for members to seek advice from a financial adviser or to get an understanding of their retirement benefit options through retirement benefit counselling – a service which is accessible via their retirement fund. “Having a long-term relationship with a professional financial adviser who will offer appropriate advice is paramount to reaching ones financial goals and ensuring that the member’s dependants are taken care of in the event of death.

Finally, Portrag highlights the importance of keeping beneficiaries’ information up-to-date. Out-dated or missing beneficiary nomination forms are very often the reason for lengthy delays on the payment of a death benefit – a time when the member’s dependants are often in financial need. As circumstances change from time to time, it is therefore crucial for members to regularly update their beneficiaries’ information so that their death benefits can be paid to the right people without any unnecessary delay,” Portrag concludes.

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