Death in service is usually provided by an employer. It means they’ll pay out a tax-free lump sum of cash if you die while you’re employed by the company.
You might need to name who you’d like the lump sum to be paid to. For example, your family members.
Usually, you’ll only be eligible for a death in service benefit if you’ve signed up for the relevant pension scheme. We explain more in this guide.
Who gets the death in service payment?
Death in service is a type of life protection benefit. It pays out a sum of money to your dependents if you die while you’re working for the company. You don’t need to die while you are at work, or because of something to do with your work. You just need to still be employed by the company offering this benefit.
When you sign up to the cover, you should be given information on how it works including:
- The amount of cover available
- How death in service payments are made
- How to set it up
Often there’s a trust set up and the members of this, also called trustees, are in charge of the policy. They decide where the money will go if it needs to be paid out. You should also be able to name beneficiaries, but ultimately the trust is responsible for deciding where the money goes.
It could be a good idea to write a ‘nomination of benefits’ letter when you set the policy up stating who you’d like the money to go to. This is especially important if you aren’t married or in a civil partnership and want the money to go towards your partner. This is because, legally, they aren’t automatically entitled to it if you die.
When is death in service benefit paid out?
Death in service benefits pays out if you die while you're working for the company providing the benefit.
The amount of time between the person dying and the lump sum payment varies depending on:
- The type of policy
- The circumstances of the death
- The number of beneficiaries.
As death in service insurance is tied to a company, it also requires their input to finalise and complete the process of paying the money out.
In complicated situations this could take months but if everything is straightforward it should be a much quicker process.
How much is a death in service payment?
Usually death in service pays out between two and four times your annual salary. For example, if you were earning £35,000 a year, three times this amount would be a lump sum of £105,000.
Typically death in service insurance pays out a lot less than traditional life insurance policies. Therefore even if you have this benefit with your employer, it could be worth buying additional protection.
Is death in service payment taxable?
The money paid out from a death in service policy to your family or dependents isn’t taxable. This is because it’s held within a trust by your employer and this means inheritance tax can’t be applied to it.
This works in the same way as if you’d set up a standalone life insurance policy in trust.
Will death in service cover my mortgage?
You can request it goes upon certain things, such as a mortgage. But it’s up to the trustees and your beneficiaries to spend the money.
This is where life insurance can me more beneficial. If you want to ensure your mortgage is covered when you die, a mortgage life insurance policy might be a better option. For added protection, you could have a policy in place as well as death in service.
It’s also important to remember that if you leave your job the benefit ends. There’s no guarantee your next employer will offer the same benefit.
What's the difference between death in service benefit and life insurance?
While death in service and life insurance work in similar ways, there are some key differences to be aware of:
- It's only paid if you’re on the payroll of the company offering the benefit
- The money is held in a trust
- The trustees decide where it’s paid
- The lump sum is between three and four times your annual salary
- It's not an automatic benefit offered by all companies
- Here are some of they key differences with life insurance:
Here are some of the key differences with life insurance:
- It's an insurance product you choose and pay a monthly sum of money for
- You set the amount of money to be paid if you die
- The money doesn’t need to be in a trust, although this could help you abvoid inheritance tax
- You choose the insurer you want to provide the policy, and can switch if you need to
- Larger sums of money are available to cover financial dependents or mortgage payments
- Other products, such as health insurance or critical illness insurance, can often be linked
Pros and cons of death in service benefit
- Free benefit from your employer
- Between three and four times your annual salary is usually covered
- Death doesn’t need to be because of work, or while you’re at work
- The money can be sheltered from inheritance tax as it is kept in a trust
- The amount of money left might not be enough to cover mortgage payments or to provide for financial dependents
- You only get the benefit while working for the company offering it
- Not all companies offer this benefit
- There might be limits on who gets the benefit, depending on how long you work for a company or what level you’ve reached
Pros and cons of life insurance
- You set the amount of money you want to leave behind
- Money could cover a mortgage or financial dependents
- The sum left can be changed during the policy
- Flexibility to choose an insurer and policy
- Free to switch policies if you find a better deal
- No limitations on who can buy a policy
- If you don’t pay every month the policy might end
- More expensive the older you get
- Higher premiums if you have pre-existing conditions