It’s easy to put off talking about death but having protection, such as death in service cover, could provide a helpful financial lifeline for those left behind. There are lots of different types of life insurance available and therefore it’s important to know how each works, what protection they provide, and how much they cost.
What is death in service benefit?
Death in service is a form of benefit that's provided by an employer. If your employer offers this benefit and you’re eligible for it, it means they’ll pay out a tax-free lump sum of cash if you die while you’re employed by the company in question.
In some cases, death in service benefits are linked to company pensions. Often, you’ll only be eligible if you’ve also signed up for the relevant pension scheme.
When signing up to this type of insurance, you might need to name the person or persons you’d like the lump sum to be paid to. This is usually family members such as your partner or young children.
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?
All types of life insurance are paid out when the person named in the policy dies. With death in service this must be while they’re working for the company providing this benefit.
The amount of time it takes between the person dying and a lump sum of money being paid 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.
To understand how much a policy pays out you don’t need a death in service calculator. Instead, you can just multiply the annual salary of the policyholder by the number of years it covers.
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.
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.
Death in service benefit
- Only paid if you’re on the payroll of the company offering the benefit
- Money held in a trust
- Trustees decide where it’s paid
- Lump sum of between three and four times your annual salary
- Not an automatic benefit offered by all companies
- 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
- Money doesn’t need to be in a trust, although this could help with inheritance tax
- You choose the insurer you want to provide the policy, and can switch if you need to
- Larger sums of money available to cover financial dependents or mortgage payments
- Other products, such as health insurance or critical illness insurance, can often be linked
Death in service benefit vs life insurance: Which is better?
It’s hard to compare life insurance to death in service benefit. This is because, while at a first glance they may seem similar, they actually work in different ways.
To start with there are lots of different types of life insurance, from mortgage life insurance to whole of life cover. Death in service is a one-size-fits-all benefit.
When looking at the overall amount of money available, you generally always have more with a life insurance policy. You set the amount that’s paid out, but in general it’s around 10 times your annual salary. This can then be used for whatever you’ve chosen, to cover a mortgage or to provide for children financially.
While the amount of money from death in service benefit might sound a lot, when you add up all the costs involved it can easily get swallowed up quickly. The cost of a funeral alone can be around £3,800 and there’s all the costs of losing an income to think about.
This could be an added stress in an already stressful time, with additional bills such as:
- Mortgage payments
- Utility bills
If you’re unsure, work out your annual costs and then calculate how much money you’d need if one income was missing, or if one person wasn’t able to do jobs such as childcare, washing, and other duties around the house Then multiply this by the number of years left until your youngest child turns 18 (or older if you’d like it to cover university fees).
Add any other costs such as your mortgage or any outstanding debts and you should have a rough idea of how much money you’d need. Compare this cost to the amount of money available from both death in service and life insurance and you should have your answer.
Death in service benefit could be a huge bonus to have. But if you want complete cover for your family and those left behind you might want to buy a separate life insurance policy too.
You can always take off the money from your death in service benefit which should help to lower your life insurance premiums. Other policies, such as income protection, might also be worth looking at if you’re looking to buy insurance to cover a loss of income.
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
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
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Will death in service cover my mortgage?
With life insurance, you can specifically set money to pay off a mortgage. With death in service benefit, however, it’s up to your beneficiaries or family members to use the money how they wish.
You can request it goes upon certain things, such as a mortgage. But it’s ultimately up to the trustees and your beneficiaries to spend the money.
Therefore if you do want to ensure it covers your mortgage, 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.
Death in service benefit FAQs
Do I have death in service benefit?
Death in service isn’t a benefit offered by all employers and one some may only give to those who’ve been with a company for a number of years. You should be told when you join a company but if you’re unsure, ask your employer or its HR department.
Do employers have to offer death in service benefit?
Employers don’t have to offer death in service, it’s a benefit that some choose to give to employees. You can always ask before you join a company what benefits it offers.
What’s the NHS death in service benefit?
If you work for the NHS, it has its own death in service benefit for employees. This is available to those who are active members of the NHS pension scheme. If you die while working for the NHS the benefit should be paid to your beneficiaries. You can find more details on the NHS website.
Should I still get life insurance if I have death in service cover?
You don’t need to get life insurance if you have death in service cover, but it could provide your loved ones with extra money if you die. Having it in place could give you extra peace of mind knowing that they’re financially provided for if you die.