The article below is intended to provide a general description and is not to be treated as advice or a description of a specific life insurance policy or death in service benefit.
What is death in service?
Death in service is an employee benefit provided by your employer, whereas life insurance is a separate insurance policy you buy which helps to protect your family from ongoing mortgage repayments and utility bills.
Typically, death in service insurance will pay out a tax-free lump sum of between two and four times your annual salary. You can’t choose the amount of cover. For example:
If you earn £25,000 a year your family could expect to receive between £50,000 and £100,000. Of course, this figure may not be enough to cover the outstanding mortgage or what your family might need in future.
To receive the payout, you’ll probably need to be on the company’s payroll.
Am I covered by death in service?
Not every employee is covered by death in service and the size of payouts will differ from company to company.
To find out if you have a death in service policy, you could contact your personnel/human resources department.
Who receives the death in service payout?
This is not a savings account or investment policy. A payout is only made if you were to die while working for your current employer.
However, it’s a tax-free lump sum of money that will be left to your dependents or placed into a discretionary trust. You may be asked to make your wishes known, but trustees often have the final say on who is entitled to the sum.
This money will be paid as a one-off amount, but you should refer to the rules of your scheme to check how your employer scheme works.
What are the pros and cons?
There are benefits and drawbacks to having death in service cover from your employer, and we’ve listed the main ones below. Remember, it’s completely different to a separate life insurance policy.
Pays out if you die while working with an employer that provides death in service
Usually offered free of charge as part of your overall benefits package
The final payment is tax-free
Payment is usually between two and four times annual salary
If you leave the company you won’t be covered anymore, possibly leaving your family at financial risk if you die
You don’t choose the amount of cover, so the payment may not provide everything your family needs
Schemes are often set up under a discretionary trust, which means you might not know who will get the money if you die
You may have to be part of a pension scheme to be eligible for death in service
You can’t assign your benefits to cover your mortgage
What’s the difference between death in service and a life insurance policy?
There are clear differences between death in service and a life insurance policy. Having both provides your family with extra protection should you die – but a life insurance policy should be considered no matter what your circumstances. As always, make sure you calculate the amount of cover to get an idea of how much you may need.
Here are some of the key differences:
|Death in service cover||Life insurance|
|An employer scheme that pays out if you die while on the payroll.||A policy that lasts the length of your term, and for the amount you choose.|
|Likely to be included within an employer benefits package.||Monthly payments are made. Depending on the policy you choose, once you buy life cover, you may pay the same amount for the duration of the policy.|
|If you leave the company, you’ll no longer be covered.||Life insurance continues to the end of your policy and you may be able to update your cover.|
|Your family will be entitled to between two and four times your annual salary.||Your joint policyholder (if you have one) or estate will receive the pre-agreed amount, which could cover your outstanding mortgage and provide an additional cash sum. Your will can be used to specify how your estate is divided.|
|Schemes are often set up under a discretionary trust, which means you might not know who’ll get the money if you die.||You can decide who should receive the full life insurance payout using a trust or a will if the life insurance proceeds go to your estate.|
|You can’t assign your benefits to cover your mortgage.||The recipient(s) of a life insurance policy from a joint policy or an estate can use it as they wish.|
Do I need death in service and life insurance?
It’s not uncommon for people to think they don’t need both but if your death in service payment wouldn’t cover all outstanding debts, you’ll want to consider life insurance as extra cover.
Would your family struggle to cope financially with the death in service payment alone? If so, you’ll want to consider a life cover policy. Life insurance can protect mortgage payments, debts, ongoing costs and even helps pay towards funeral expenses.
Take a look at the following example:
You earn £25,000 a year.
Your death in service payout is £75,000.
Your outstanding mortgage is £200,000.
Your family may still have to find or make mortgage repayments on £125,000, without your income.
A life insurance policy can help to make sure all debts are fully cleared on death. You can have peace of mind knowing your family is financially secure.
Also, death in service only counts if you continue working for the same employer. Once you leave, the benefit comes to an end, with your next employer not offering it as a benefit.
Life insurance is for a specific amount and for the length of your policy, which can help to provide financial stability and assurance for your loved ones.