According to a study by the Association for Savings and Investment South Africa (Asisa), South Africans are underinsured for disability by about 60%.
But this is all about to change. And it's thanks to the Income Tax Act (ITA) amendments that will come into effect on 1 March 2015.
Keep reading to find out how these amendments will benefit disability claimants and, most importantly, how this change in the tax treatment of income disability will affect you as an employer.
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What you need to know about the ITA's disability claims amendment
In a Fin24
report, Brice Salence, the head of insurance pricing and reinsurance for group risk at Momentum Employee Benefits explains that, currently, premiums on income protection policies are tax-deductible, but income at claim stage is taxed.
But, following the amendment, premiums will no longer be tax-deductible, income received will be tax-free. And that means claimants can expect a larger pay-out.
According to Salence, the current method that you, as the employer, use to determine contributions is the one that makes disability benefits insufficient to meet disabled claimants' needs.
But the ITA's amendment will make it possible for claimants with higher marginal tax rates to benefit the most as tax-free income payments will align them more closely to their monthly income.
And although individuals in lower-and middle-income brackets won't benefit as much, some may already benefit from government grants.
So what does this all mean for you as an employer?
Here's how the ITA's disability claims amendment will affect employers
There are three ways this amendment will affect employers:
According to Salence, first, higher replacement ratios may reduce the incentive for disability claimants to return to work and that means you may lose valuable employees and may have to find people to replace them.
Two, more claims will be approved because more claims will be submitted.
'The tax change presents an opportunity to somewhat close the insurance gap next year if clients accept price increases and don't reduce their cover. This will ensure that their insurance needs are met and thereby increasing their financial wellness,' added Salence.
And finally, the method you use to determine contributions will likely change.
We'll keep you up-to-date with this ITA disability claims ame
ndment so you know how to comply when the amendment comes into effect next year.
In the meantime, if you have questions about this ITA amendment, direct your questions to our experts at www.accountingandtaxclub.co.za.