What is a death in service benefit and how is it different from life insurance?
Many employers will offer a death-in-service benefit to their employees which will pay your dependents a specific sum if you were to die while you’re on their payroll.
Key takeaways
Provides a tax-free lump sum to a chosen beneficiary if you pass away while employed
Funds typically go to a partner or child to be used for significant financial responsibilities like housing costs or bills
Death in service benefit payments are conditional on employment status and will end if you leave the company or are terminated
This is part of the employee benefits package and is not deducted from your salary
What is death in service?
Death in service is a benefit offered by some employers as part of your employee benefits package. It provides a tax-free lump sum of money paid to a person of your choosing, e.g. your husband or wife, if you die while working for the company.
Death in service payments are often based on group life insurance policies taken out by employers and are typically exempt from inheritance tax.
Does an employer have to pay death in service?
No, employers are not legally required to offer death in service benefits. It is an optional benefit that some employers provide, often as part of their workplace pension scheme.
How does death in service cover work?
This service benefit is part of an employee's benefits package and is not deducted from their salary. Upon the employee's death, a lump sum is paid out to the dependents or into a discretionary trust.
The amount is usually a multiple of the annual salary, e.g. four times, and while the death doesn't need to occur at the workplace or be work-related, the employee must be on the payroll at the time.
Who can claim a death in service payout?
The payout from a death in service benefit often goes into a discretionary trust, with the employer acting as trustee. However, the employee's wishes are taken into account, and the money can be paid out directly to the chosen beneficiary.
To ensure that the tax-free money reaches the right hands, you must nominate a beneficiary. This is why it’s a good idea to write a “nomination of benefits” letter stating who you’d like to receive the money if you pass away. This must be a person and not, for example, a bank or mortgage provider.
What is the average death in service payout in the UK?
The average death in service payout in the UK is typically between two and four times the individual's annual salary.
How do I calculate death in service benefit?
To calculate the death in service benefit, identify the multiple (usually two to four times) of your annual salary specified by your employer. Then, multiply your current annual salary by that multiple.
For example, if your salary is £35,000 and the multiple is three times, the death in service benefit would be £105,000.
Does death in service cover mortgage payments?
While most death-in-service benefits are a multiple of your salary, it is unlikely that it will be enough to pay off a mortgage. Therefore, you may want to consider an additional life insurance policy if you would like your mortgage debts to be paid off once you pass away.
What's the difference between death in service and life insurance?
Life insurance offers more control over the payout amount and terms, and it remains in effect regardless of your employment status. On the other hand, death in service cover is a free benefit that ends with your job.
A life insurance policy allows you to choose the amount of cover you would like, the time span you want to be covered for, and exactly where you would like your money to go. You can also add extra protection to each type of life insurance policy, including critical illness cover.
Here are some key differences:
Life Insurance | Death in Service Benefit | |
|---|---|---|
Purpose | Provides financial security for dependents. | Acts as an additional benefit tied to employment, not a standalone policy. |
Who provides it? | Offered by insurance companies and purchased individually or via an employer. | Provided exclusively by an employer as part of an employee benefits package. |
Cover period | Valid as long as premiums are paid or until the policy term ends. | Coverage only applies while the individual is employed by the company offering the benefit. |
Amount paid | Chosen by the policyholder (e.g., a fixed amount or multiple of annual salary). | Typically a multiple of the employee’s annual salary (e.g., 2x, 4x, etc.). |
Is it portable? | Yes, the policyholder retains it even if they change jobs (if individually purchased). | No, the benefit ends when the employee leaves the job. |
Can I change my cover? | Yes, options for critical illness, policy terms, and more. | No, fixed terms, which generally determined by the employer. |
Cost | Premiums are paid by the policyholder (or employer if provided as a benefit). | Employer-funded; no cost to the employee. |
Tax | Beneficiaries typically receive payouts tax-free (subject to local tax laws). | Payouts are generally tax-free under most circumstances. |
Each has its own advantages, but life insurance offers more flexibility and control, while death in service benefits are a convenient, employer-funded perk.
How long does it take to get the money from death in service?
It can take as little as two weeks for a death in service payment to be made, but some families may have to wait a month or more. Delays can occur due to missing paperwork or the need for an investigation into the cause of death.
Compare life insurance quotes with MoneySuperMarket
Taking out life insurance ensures your family is protected whatever happens in your working life. If you want to look into taking out a policy, you can compare life insurance quotes quickly and easily with MoneySuperMarket.
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