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Death-in-service cover

What is a death in service benefit and how is it different from life insurance? 

published: 06 October 2022
Read time: 5 minutes

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. 

Death in service benefit and life insurance are similar in that both can help protect your loved ones in the event of your death. We’ll explore some of the differences in this guide and investigate what death in service benefit offers.  

What is death in service?

Death in service insurance is an occupational benefit offered by some employers that pays out a lump sum to a person of your choosing if you’re working for the company at the time of your death. 

There is no legal requirement for employers to provide a death in service benefit. Many UK companies offer a death in service benefit as an added perk of working for them.

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How does death in service benefit work?

Your death in service benefit is paid out by your employer if you pass away while you’re still an employee. This benefit is usually given as a free perk by employers rather than as a salary sacrifice option.  

This money can be paid out directly to your chosen beneficiary, or could also go into a discretionary trust that then pays it to your loved one.  

Either way, it’s important to nominate the person you want to receive the money should you die unexpectedly. 

The money received from a death in service policy is tax-free and is usually a multiple of your annual salary.  

Being eligible does not depend on you passing away at work or because of a work-related accident – you just need to be on the payroll at the time of your death. 

How much do you get paid for death in service?

How much money your dependents receive depends on the terms of the package, but in most cases, it’s based on the amount you earn. Most policies pay out a multiple of your salary – for example, three or four times the amount stated on your contract. 

Is death in service the same as life insurance? 

No. While both options provide your loved ones with a lump sum when you pass away, death in service benefit is restricted to a certain amount (usually a multiple of your current salary), is also only available to you if your company offers it and if you pass away while you are on their payroll.  

The benefit will end as soon as your employment does while a life insurance policy allows you to choose the amount of cover you need, choose the number of years you need protection for and exactly where you would like your pay-out to go.  

Who can claim a death in service pay-out?

Most of the time, the money paid out by death in service cover isn’t received directly by your loved ones. Instead, it gets put into a discretionary trust that pays the money out to your beneficiaries.   

This means that the trustees – usually your employer – will have the final say on where the lump sum goes. However, your wishes will be taken into account.  

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 has to be a person and not, for example, a bank or mortgage provider.  

How long does it take to get a death in service pay-out?

The time it takes for a death in service payment to reach your loved ones will depend on your employer and how well you have organised paperwork. If everything goes smoothly, it can take just two weeks – but some families have to wait a month or more for the money to come through.  

The best way to ensure your dependents get the money as timely as possible is if you ensure that while you are alive, your paperwork including your nomination letter (also known as an expression of wishes) is completed.  

Will death in service benefit cover my mortgage?

If your death-in-service benefit amount is less than your mortgage, it’s not going to cover it.  

While most death in service benefit 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. 

Your loved ones can use a death in service benefit pay-out to pay off part of a mortgage or any other outstanding debts. But it’s up to them to decide how they spend the money after you’re gone. 

A death in service policy will only pay out to a person. You can’t nominate your mortgage provider as the recipient of a death in service pay-out. If you want a policy that does this, you will need to take out separate mortgage life insurance. 

Life insurance vs death in service benefit 

Life insurance and Death in Service benefit are designed to do the same thing: Provide a financial cushion for your loved ones in the event of your death. The main difference between them is with life insurance, you have more control over the amount your family receives. 

If your employer offers you a death in service benefit as a perk, it is certainly a positive thing. However, you will need to think whether the multiple of your salary that your company are offering you, is enough to pay off any debts you owe or help support your family.  

A life insurance policy allows you to choose the amount of cover you would like, the time span you want to be covered for, how you would like your benefit to be spent and exactly where you would like your money will go with.  

The money paid out by death in service cover may seem like a lot, but it can be eaten up fast by funeral costs, paying off any debts you owe.  

Most insurance advisers recommend that life insurance policies pay out ten times your annual income, which is a lot more than even the most generous death in service benefits. 

You must also note that a death in service benefit terminates as soon as you are no longer employed at that company. It is also an optional benefit that not all companies offer. Therefore, it is likely that whatever job you move on to, may not offer that benefit at all.  

Should I get life insurance if I have death in service benefit? 

Having some financial protection is better than no protection at all. However, a perk that your company offers you leaves you with no guarantee that you will stay at that company on in that role. Life insurance ensures that you have security of knowing that as long as your premiums have been paid to date, your loved ones will be financially catered for in the event of your death.  

Getting a life insurance policy  

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.  

We work with the UK’s leading life insurance providers to help you find the right cover at the right price. 

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