Words on Wealth: Claims processes differ depending on the product

Sometimes a financial provider is inflexible and unreasonably harsh in refuting or delaying a claim. Picture: Independent Newspapers.

Sometimes a financial provider is inflexible and unreasonably harsh in refuting or delaying a claim. Picture: Independent Newspapers.

Published Mar 23, 2024


THE social media furore around the alleged failure of Old Mutual to pay a claim warrants an explanation about different types of claims and payouts involving insurance companies and retirement funds.

As people pile scorn on cases such as these – so easy to do – the details quickly get lost in the invective. An “evil” company; an unpaid claim. The laziness of public opinion.

I won’t comment on the way Old Mutual handled the storm; my aim is to give you a better understanding of claims processes, so that if you have to claim for something one day, you will know roughly what to expect.

Sometimes a financial services provider is inflexible and unreasonably harsh in refuting or delaying a claim. But more often than not providers settle claims without fuss because that is their business. Hitchless claim payouts, of which there are thousands every day, don’t rack up high shares on Facebook.

Old Mutual, like financial giants Sanlam, Discovery, Momentum Metropolitan, AlexForbes and Liberty, has different divisions with different specialities: investments, long-term insurance, short-term insurance, retirement fund administration, financial advice, banking, deceased estates … It had a medical scheme for a while, too.

Each type of financial service is subject to its own legislation: the Collective Investment Schemes Control Act governs unit trust investments; the Insurance Act governs insurance; the Pension Funds Act governs retirement funds; the Financial Advisory and Intermediary Services Act governs financial advice; and there are acts governing banking and deceased estates. My list is illustrative, not comprehensive.

You can claim from a financial services provider under a variety of different circumstances. Depending on the type of claim, corresponding legislation comes into play – and not only the acts referred to above. For example, if a divorce gives rise to a claim, as it did in this instance, the Divorce Act and the Matrimonial Property Act also apply. So paying a claim can be a legal minefield, which may take time to manoeuvre.

Let’s look at the financial services in turn, when it comes to claims. Note: this is the procedure as it should occur if there are no hiccups.

Short-term insurance

You are insured for something like a house or a bike. Valid claims are settled promptly after the claim form and supporting documents are submitted, either directly through a cash payout or by paying a supplier. Simple.

Long-term insurance

The complexity of the claims process depends on the product:

• Funeral policies: a valid claim is settled promptly once documents such as death certificates and ID documents have been submitted. A claim should pay out within days, to cover the funeral.

• Life policies: I refer to individual policies, as against group risk life cover, discussed below under retirement funds. A valid claim, accompanied by the relevant documentation, may take a week or two longer than a funeral policy to pay out, as larger amounts are involved, so a more thorough check by the insurer may be necessary. But we aren’t looking at months. The payout goes directly to the nominated beneficiary/ies on the policy. Only if there are no nominated beneficiaries is the money paid into the deceased estate.

• Disability policies: these are complex, because products differ widely. But if your condition fits the product’s criteria and you have supporting medical reports, you will be paid out according to the policy terms – either a lump sum or a recurring amount to replace a salary – and it should happen promptly.

Retirement funds

Claims against retirement funds take much longer to be finalised. This is partly because there is tax involved, which is not the case with insurance claims, but also because of the onerous requirements of the Pension Funds Act.

• Resignation or retrenchment: if you want to withdraw your savings in cash, the retirement fund needs a tax directive from SARS because tax must be deducted. If you are transferring the money into a preservation fund, it is subject to the rules of inter-retirement-fund transfers in the Act and its regulations. These processes can take months – bank on at least two.

• Retirement: you may withdraw up to a third in cash, subject to tax, while the other two-thirds must be transferred into a post-retirement annuity product. Again, this will not happen overnight, as there must be compliance with tax and transfer regulations, and should be planned for well beforehand.

• Death: here the notorious Section 37C of the Act comes into force, and it applies not only to savings accumulated in the fund but also to long-term insurance payouts under group risk cover (your life cover as an employee). This requires the fund trustees to consider not only your nominated beneficiaries but also people who are financially dependent on you that you may purposefully have left off the beneficiary list, such as illegitimate children who are legally liable for maintenance. This investigation process by the fund may take up to a year.

• Divorce: a divorcing spouse can claim a portion of a fund member’s accumulated savings, or “pension interest”. This must be done through a court order directed to the fund, once the divorce agreement has been finalised. The wording of the order must be very precise or the fund may fail to comply. Again, this may be a frustratingly lengthy process.

The Old Mutual case

The case that caused the furore was unique in that, as I understand it according to the news reports, a court order ordering an Old Mutual-administered pension fund to pay out a portion of a member’s pension interest to his ex-spouse in a divorce agreement was received by the fund only after the member had retired from the fund. He had taken a portion of his savings as a lump sum and transferred a portion into a post-retirement living annuity. This presented a dilemma, because the tax treatment of pre-retirement and post-retirement products differs and the transfer could not be undone.

Old Mutual said it was working to resolve the matter as quickly as possible.

* Hesse is the former editor of Personal Finance