grade 12 business studies head for success. topic 2: investment insurance term 3

Grade 12 Business StudiesHEAD FOR SUCCESS

Topic 2:Investment Insurance

TERM 3

INTRODUCTION:An insurance contract is a contract

between an insurer and an insured.The insurer undertakes to compensate the

insured for losses suffered as a result of a specified risk.

The purpose of insurance is to indemnify the insured against risk, e.g. fire, storms, burglary.

INVESTMENT INSURANCE

INTRODUCTION:There are two requirements for a valid

insurance contract:


Good faith Insurable interest

• People who take out insurance policies must be made aware of what it is they are buying.

• Insurance policies must be carefully studied, so that the insured knows what he/she is covered for and under which conditions.

• People in the business-world use the Latin phrase “caveat emptor” (buyer beware).

• The insured has an insurable interest in something or someone if the insured stands to lose financially if goods are destroyed, or if a person dies.

• Examples of insurable interests include:

Debt creates insurable interest between a debtor and creditor.

Married people have an insurable interest in one another’s lives.

A home owner has an insurable interest in his/her house.

INTRODUCTION:In insurance, the excess is the amount of expenses

that an insured must pay out of pocket before and insurer will pay the balance of the claim.

An excess could be a percentage of the amount claimed, i.e. insured pays 10 % of the claim before the insurer pays the other 90 %, or a fixed amount, i.e. insured pays the first R2 000 of the claim.

Excess is designed to deter policyholders from claiming for each and every minor incident.

This leads to lower total claim administration and underwritten costs and, therefore, more affordable insurance premiums.


INTRODUCTION: Important defi nitions relating to insurance are:


Insurer • Enterprise that provides cover against insurable risks.

Insured • Person/business enterprise that needs insurance coverage.

Clause • Paragraph in an insurance contract.

Subrogation • Means “to stand in the place of”.• Suppose A drives negligently and causes an

accident damaging B’s car. B will claim damages from his/her insurer, which in turn will claim from A. B is not allowed to claim damages from both his/her insurer and from A, if B’s claim against A has been taken over by B’s insurer.



Average • Average refers to under-insurance and over-insurance.

• Under-insurance means that property is not insured for its full market value.

• Over-insurance means that property is insured for more than its market value.

• In the case of under-insurance, the insured will have to bear part of the risk.

• In the case of over-insurance, the insurer can choose to reinstate the insured for the losses suffered.

Reinstatement • The insurer can replace the damaged or stolen goods instead of paying the amount to the insurer.



Excess • Short term insurance companies expect the insured to pay a certain amount when a claim is lodged.

• Amount differs – the excess when a claim is lodged to replace a front window of a vehicle will be less than when the vehicle is stolen.

Market / replacement

value

• Fixed property is often insured for more than book value because fixed property generally appreciates.

• Fixed property should be insured at its market or replacement value.

• Replacement value refers to the price of the asset at that moment.

Book value • Book value = purchase price less depreciation.

INVESTMENT INSURANCETHE IMPORTANCE OF INSURANCE FOR BUSINESSES AND INDIVIDUALS:WHY BUSINESSES NEED INSURANCE WHY INDIVIDUALS NEED INSURANCE

Business enterprises need:• Insurance that enables business

partners to buy a deceased partner’s share in the business.

• Cover for theft and fire if large amounts of stock are kept on the business’s premises.

• Product liability insurance against losses due to damage or injury caused by failure of a business’s product or a product that the business sells.

• Public liability insurance to protect the business against claims from people (employees and customers) who were injured on a business’s premises

Individuals need insurance to:• Enable them to retire

comfortably.• Cover themselves against

claims by people who sustain injuries in vehicle accidents.

• Cover their debts in the event of death.

• Provide income for their dependants in the event of death.

• Protect themselves against losses due to fire, theft, burglary, motor vehicle accidents and storm damages.

• Protect themselves against losses due to unemployment (UIF).

• Protect themselves against losses due to illness (medical aid).

INSURANCE AND ASSURANCE:A wide range of different types of insurance is

available – each with different purposes.Short-term insurance typically refers to the

insurance of goods (e.g. multi-risk policies, asset policies, personal property policies).

Long term insurance typically refers to the insurance of life events (e.g. retirement, annuities, pension funds, life policies, disability policies).

Insurance can be categorised according to the following features:Whether it’s insurance or assurance.Whether it’s compulsory or non-compulsory


INSURANCE AND ASSURANCE:The diff erence between insurance and assurance:


Insurance Assurance

• Based on a principle of indemnity.

• The purpose of insurance is to indemnify the insured against certain types of risk (e.g. a car accident or fire in an office building).

• The insurer undertakes to restore the insured to the same position that was occupied before the occurrence of the event.

• The insured undertakes to pay a regular premium, typically monthly, in return for the indemnity against a specific risk or set of risks.

• Based on a principle of certainty.• The insured is assured of payment

when a certain event occurs (e.g. death or retirement).

• The insurer undertakes to pay a specified benefit (in the case of death, disability or dreaded disease) or total investment amount (in the case of a retirement annuity) when the insured event occurs.

• The insured undertakes to pay a regular premium (typically monthly) in return for the benefit amount when the event that it covers occurs.

INSURANCE AND ASSURANCE:Life insurance:Insurance on the life of a human being (that

cannot be replaced).Includes life policies, endowment policies and

disability policies.Allows the insured person to make provision for

his/her dependants when he/she dies or becomes permanently disabled.

A life insurance policy pays out a lump sum after death to provide for dependants and settle debts, e.g. outstanding balance on the car or house.

The principle of security applies.


INSURANCE AND ASSURANCE:Life insurance:The Long Term Insurance Act (No 52 of 1998)

distinguishes between six types of life insurance policies:


Sinking fund policy

Pays out a sum of money on a fixed future date, in return for a premium.

Health policy Provides benefits to the insured upon the occurrence of an event relating to the health or mind of the insured.

Life policy Provides benefits after, and exclusively as a result of, a life event (e.g. death).

Assistance policy

A policy of which the policy benefits do not exceed R10 000.

Fund policy Provides benefits to finance the liabilities of a fund, e.g. a pension fund.

Disability policy

Provides benefits upon the occurrence of a disability event (when the functionality of the mind or body becomes impaired).

INSURANCE AND ASSURANCE:Life insurance:Insurance on mortgage bonds is available to ensure that

dependants are not left with a large burden of debt in case the insured person (who is often also the major or at least an equal breadwinner) dies before the mortgage has been fully repaid.

Advantages of life insurance are: Life insurance pays outstanding debt, e.g. car or bond,

when the policy holder passes away. Life insurance ensures that the dependants of a policy

holder will have money to cover costs after the policy holder passes away.

Life insurance ensures that a policy holder has money if the policy holder becomes disabled or suffers from dread disease.

life insurance policies can be adjusted.


INSURANCE AND ASSURANCE:Life insurance:The following factors infl uence the premium on life

insurance: Age of the insured when the policy is taken out – the higher

the age, the higher the premium (because the shorter the possible time is).

Lifestyle (drinking, smoking) Occupation – premiums will be higher for people who have a

dangerous profession such as employees in the SAPS. Gender – men’s life expectancy is shorter than women, and

therefore the premium is higher than for women. Hobbies / sport type – e.g. skydivers will pay a higher

premium. Medical history and current medical status. Monthly income – will you be able to pay the monthly

premium? Insured amount, etc.


INSURANCE AND ASSURANCE:

Retirement annuities: A kind of pension plan (governed by the Pension Funds Act, No 24

of 1956) which aims to create wealth for retirement. Originally created for self-employed people, because self-

employed people do not receive any employer’s contributions towards their pension or provident funds.

Retirement annuities are very popular, because retirement annuity contributions are tax deductible up to a specifi c amount.

A person can make monthly, annual or lump sum contributions to a retirement annuity.

The money in a retirement annuity can only be accessed once the insured person reaches retirement age, unless he/she is disabled.

The insured then has 2 choices: 1/3 of the value of the retirement annuity is taken in cash, and 2/3

of the retirement annuity is contributed towards a pension fund that will provide a future monthly income, OR;

The full value of the retirement annuity is contributed towards a pension fund that will provide a future monthly income.


INSURANCE AND ASSURANCE:

Retirement annuities:

People over the age of 69 are not allowed to contribute to a retirement annuity.

A person can retire from a retirement annuity fund at any time between the ages of 55 and 69, whether the person still works or not.

Advantages of a retirement annuity include: Funds in retirement annuities are protected from

creditors. The income after retirement is guaranteed for life. Lump sum contributions can be made at any time. Retirement funds are taxed at a favourable rate. A change in employment will not affect a person’s

retirement provision.


INSURANCE AND ASSURANCE:The diff erence between life insurance and

retirement annuities:


Life insurance Retirement annuity

• Pays out when a policy holder dies, becomes disabled or suffers from dread disease.

• Aims to provide for a breadwinner’s family after the breadwinner passes away.

• For the benefit of the deceased’s family.

• Person starts receiving income upon retirement.

• Aims to create wealth for retirement.

• For the benefit of the retirement annuity holder.

INSURANCE AND ASSURANCE:Retirement reform:Retirement reform is a plan through which

government aims to accomplish the following: Encourage employees to save for retirement. Encourage employers to provide retirement savings

plans as part of employees’ contracts of employment.

Retirement reform is a continuous process with important changes that came into effect on 1 March 2015.


INSURANCE AND ASSURANCE:Retirement reform:Look at some changes that have taken place and

are still in the process of taking place:


Before reform After reform

There were no tax deductions for provident fund members.

Members of provident funds, pension funds and retirement annuity funds will be able to claim a tax deduction on their contributions to their funds.

Often, employees redeem their retirement benefits upon resignation.

Government proposed that an employee’s retirement benefits should rather be placed in a preservation fund upon resignation.

Provident fund members used to have access to the full value of the money in the provident fund upon retirement.

Government proposed that provident fund members should upon retirement, like retirement annuity holders, take one third of the value of the provident fund in cash and contribute the remaining two thirds towards an annuity.

INSURANCE OF GOODS: COMPULSORY AND NON-COMPOLSORY

INSURANCE:Compulsory insurance:Compulsory insurance is insurance that is enforced

by law.In South Africa, this includes:

Compensation for Occupational Injuries and Diseases (previously “Workmen’s Compensation”).

The Road Accident Fund (RAF). The Unemployment Insurance Fund (UIF).

Compulsory insurance holds special significance for businesses, because it: Protects businesses against claims by employees who are

injured during the course of their work. Protects businesses against claims by dependants of

employees who die or become disabled during the course of their employment.


INSURANCE OF GOODS: COMPULSORY AND NON-COMPOLSORY INSURANCE :

Compulsory insurance:

a) Compensation for Occupational Injuries and DiseasesThe Compensation for Occupational Injuries and

Diseases Act (No. 130 of 1993) regulates compensation paid to workers who sustain injuries in the workplace.

Provides for compensation for disablement caused by occupational injuries or diseases sustained or contracted by employees in the course of their employment, or for death resulting from such injuries or diseases; and for matters connected therewith.

All employers must register with Compensation Fund.Each year, employers contribute towards the

Compensation Fund.The Fund covers occupational diseases and workplace

injuries.



INSURANCE:Compulsory insurance:

a) Compensation for Occupational Injuries and Diseases

Employees can claim from the Fund if an injury is sustained or a disease is contracted while:working training completing an apprenticeship

Employers must report workplace incidents and accidents – injured employees are then medically examined, after which a report is issued by the medical examiner.





The are are five types of compensation:


Temporary disability

A person is unable to work because of an injury or disease from which he/she will recover.

Permanent disability

A person sustains an injury or contracts a disease from which he/she will never recover.

Death Death of a bread-winner caused by an occupational injury or disease.

Medical expenses

Medical expenses are paid up to two years after an accident occurs or a diagnosis is made.

Additional compensatio

n

In some cases, employees qualify for extra compensation.




The compensation paid by the Compensation Fund is determined by the degree of disablement.

The Occupational Injuries and Diseases Act applies to all employers, as well as casual and full-time workers who, as a result of a workplace accident or work-related disease:are injured;disabled, or killed; orbecome ill.




a) Compensation for Occupational Injuries and DiseasesThis excludes:

workers who are totally or partially disabled for less than 3 days;

domestic workers; anyone receiving military training. members of:

the South African National Defence Force, or the South African Police Service;

any worker guilty of wilful misconduct, unless they are seriously disabled or killed;

anyone employed outside the RSA for 12 ore more continuous months; and

workers working mainly outside the RSA and only temporarily in the RSA.


INSU RA NCE OF GOODS : COM PULSORY A ND NON-COM POLS ORY INSURANCE :


b) The Road Accident Fund The Road Accident Fund Act (No. 56 of 1996) insures road-users

against the negligence of other road-users. Provides cover for all drivers of motor vehicles against claims by

persons injured in vehicle accidents, or claims by dependants of people kil led in vehicle accidents.

Cover is provided by charging a levy on fuel. The RAF only indemnifi es drivers against losses suff ered due to

bodily injuries or death, not for damage to property. Both injured parties and negligent drivers are covered by the Act. In the following cases, the RAF will pay claims to injured parties

but has the right to recover costs from the driver: If the car has been stolen or driven without the consent of the

owner. If the driver was under the influence of alcohol or any other illegal

substance. If the driver was not in possession of a valid driver’s license. If the driver caused an accident due to negligence.


I N S U RA N C E O F G O O D S : C O M P U L S O RY A N D N O N - C O M P O L S O RY I N S U RA N C E :


b) The Road Accident Fund The Road Accident Fund Amendment Act came into eff ect on 1/8/2008 and

brought about the fol lowing changes to the RAF: Previously, there was no limit on the amount that could be claimed as loss of

income. Now, a maximum of R160 000 per year applies for loss of income or loss of support.

Claimants can no longer sue the guilty party in the event of an accident. Medical cost claims will be limited to the rates charged by public healthcare

authorities. Previously, passengers were limited to a maximum claim of R25 000. The current

position is that claims of passengers will be settled in full, subject to the maximum limits (R160 000 per year).

These changes aim to ensure more fairness to al l road users: Passengers were previously limited to claim a maximum amount of R25 000, while

some drivers were awarded millions. Now, all road users are limited to R160 000 per year.

Bear the following in mind: if you become totally disabled in a road accident while you were earning a salary of, let’s say R350 000 per year, you will only be awarded a maximum amount of R160 000 per year. This means that you have to provide for your own disability insurance.

If you want to be treated in a private hospital after a motor accident, you will have to pay the diff erence between the rate of public healthcare and private healthcare yourself.




b) The Road Accident FundOne of the biggest frustrations when a person needs to

claim from the RAF is the waiting time, as the RAF has been experiencing a backlog for some time.

The Road Accident Benefi t Scheme Bill (RABS) has already been drafted in 2014 and is expected to be passed by Government in the near future.

The RABS aims to provide a benefi t scheme that is reasonable, equitable, aff ordable and sustainable.

The RABS further aims to expedite the claims process, because victims of road accidents will no longer be required to prove fault on the side of another driver.

This means that access to medical care will no longer be delayed by an investigation into the cause of an accident.


INSURANCE OF GOODS: COMPULSORY AND NON-COMPOLSORY INSURANCE :Compulsory insurance:

c) The Unemployment Insurance Fund (UIF)The Unemployment Insurance Act (No. 63 of 2001)

regulates the Unemployment Insurance Fund.The UIF is governed by the Department of Labour.The UIF insures workers against loss of earnings

arising from unemployment, and provides employees with financial support during their efforts to find employment.

Employers must pay UIF contributions of 2 % of the value of each worker’s pay, every month – the employer and the worker each contribute 1 % towards the UIF.

All employees who work at least 24 hours per month are required to contribute to the UIF.




c) The Unemployment Insurance Fund (UIF) It is the responsibility of employers to register employees

with the fund and to pay monthly contributions to the fund.An unemployed UIF contributor is entitled to unemployment

benefi ts for any period of unemployment lasting more than fourteen days if: A contributor’s contract of employment has been terminated by

the contributor’s employer or if a contributor’s fixed-term contract was terminated;

A contributor was dismissed; A contributor was declared insolvent; A contributor applied for UIF benefits in accordance with the

prescribed requirements and provisions. A contributor is registered as a work-seeker with a labour

centre established under the Skills development Act (Act No. 97 of 1998)



INSURANCE:


c) The Unemployment Insurance Fund (UIF)Workers may claim if they:

worked for more than 24 hours per month for an employer;

made regular contributions through their employer; did not resign from their employment of their own

free will; are not public servants; do not get a monthly state pension.




c) The Unemployment Insurance Fund (UIF)Types of benefits provided by the UIF:


Unemployment benefits

• Applications should be submitted within 6 months of becoming unemployed.

• Workers can claim from the day they stopped working until the day their benefits are exhausted, or they start working again.

• No tax is payable on benefits.• The UIF can stop paying benefits if a person refuses to

accept a job, go for training or go for advice.

Illness benefits

• Illness benefits can be claimed if a person is unable to work for more than 14 days and does not receive a salary, or only part of his/her salary.

• Illness benefits cannot be claimed if the contributor refuses to undergo medical treatment.



c) The Unemployment Insurance Fund (UIF)Types of benefits provided by the UIF:


Maternity benefits

• Maternity benefits can be claimed for up to 17 weeks (four months).

• Women who suffered miscarriages can claim for six weeks.

Adoption benefits

• Can be applied for when: a child under the age of two is adopted, and the person takes unpaid leave or receives only a portion

of his/her salary while at home, caring for the child.• Only one parent may claim.

Dependants’ benefits

• Can be applied for in the event of the death of the person who has been financially supporting the household.

• The spouse of the deceased can claim the benefit whether he/she is employed or unemployed.


INSURANCE:


c) The Unemployment Insurance Fund (UIF)Contributors who qualify for claiming from the UIF

must follow the following procedures: Application for unemployment benefits must be made on

the prescribed form at an unemployment offi ce. The application must be made within six months of the

termination of the contract of employment. The claims offi cer will investigate the application. If the

application complies with the prescribed requirements, the claims offi cer will: Approve the calculation Determine the amount of benefits Authorise the payment of benefits




c) The Unemployment Insurance Fund (UIF)A contributor is not entitled to claim benefi ts from the

UIF, if he/she: Receives a monthly pension from the State. Receives any benefit from the Compensation Fund

established under the Compensation for Occupational Injuries and Diseases Act (Act No. 130 of 1993).

Receives benefits form any unemployment fund or scheme established by a council as described by the Labour Relations Act (Act No. 66 of 1995).

Fails to comply with any provision of the UI Act (Act No. 63 of 2001) or any law relating to unemployment.

Was suspended from receiving benefits in terms of section 36 (1) of the UI Act.



INSURANCE:

Non-compulsory insurance:No-compulsory insurance is insurance that is

chosen by the insured and is not enforceable by law.

In South Africa, this includes: Life insurance Retirement annuities Short-term insurance (such as car and household cover)

Insurance of goods, or short-term insurance, is usually taken out for a property, e.g. a house, house contents or a vehicle.

The principle of indemnification applies.



INSURANCE:Non-compulsory insurance: Insurable risks include:


Vehicle

accident

• Vehicle insurance indemnifies an insured against damages to a vehicle in case of an accident.

Fire

• Fire insurance indemnifies the insured against losses due to fire.

• It is the duty of the insured to notify the insurer and the police if there was a fire at the business premises.

• An “iron-safe clause” compels the insurer to keep all financial and stock records in a fire-proof safe to enable the insured to provide evidence of the amount of stock that was on the premises.

• The premium that the insured pays to the insurer depends on the value of the items that are insured, as well as on the risk.

• The insurer will calculate the premium, considering the probability of the risk occurring.

• Important factors that may affect the risk include: Nature of the products or buildings. Availability of fire sprinklers. Nature of adjoining buildings.


INSURANCE:Non-compulsory insurance:Insurable risks include::


Storms

• Insurance against storm damage indemnifies the insured against losses due to storms, wind, rain and hail.

Burglary

• Insurance against burglary indemnifies the insured against losses due to forced entry into the business premises when the business is not open for business.

Theft

• Insurance against theft indemnifies the insured against losses due to all forms of theft, such as shoplifting and theft by employees.

• Shoplifting means that money or goods are stolen from the business during business hours when a person takes something without paying for it.

• However, shoplifting is a risk not usually accepted by insurers.

Money in

transit

• Business owners should insure their businesses against losses occurring when cash is stolen while being transported.


INSURANCE:Non-insurable risks:The purpose of insurance is to indemnify the

insured against risk, e.g. fire, storms, burglary.Unfortunately, not all risks can be insured.Examples of non-insurable risks include:

Loss as a result of bad business location. Loss as a result of changes in fashion. Loss as a result of fluctuations in the exchange rate. Loss as a result of changes in consumers’ tastes and buying

patterns.


OVER-INSURANCE AND UNDER-INSURANCE:Property or goods must be insured at

market value or replacement value.Market value or replacement value refers to

the current value of property and goods.Sometimes, property or goods are over-

insured or under-insured.


OVER-INSURANCE AND UNDER-INSURANCE :


Over-insurance Under-insurance

Definition

• Property or goods are insured for more than the replacement value.

• In this case, the insurer will not pay out more than the actual replacement / damages amount, but can consider repaying the additional premiums that the insured has paid.

• This is referred to as reinstatement.

• Property or goods are insured for less than the replacement value.

• Insurance premiums are calculated on an insured amount, so for an under-insured risk, the premium is lower than what it should be.

• When a claim arises, the full amount of the loss is not paid out.

• Formula to determine claim payable:

Insured value x claim amountReplacement value

OVER-INSURANCE AND UNDER-INSURANCE :


Over-insurance Under-insurance

Example:

Market value (replacement

value)

R1 000 000 R1 000 000

Insured value R1 200 000 R800 000

Damages (claim)

R200 000 R200 000

Calculation • Damages amount to R200 000.

• An insurer will not pay out more than the damages suffered.

• The insured will therefore receive R200 000 from the insurer.

Insured value x claim amount

Replacement value= R800 000 x R200 000 R1 000 000= R160 000• The insurer will only pay

out R160 000, even though the claim amount was R200 000.

grade 12 business studies head for success. topic 2: investment insurance term 3

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