How death in service differs from life insurance
Many businesses offer a death-in-service benefit, which will pay your dependents a lump sum if you die while you’re employed
What is death in service cover?
Death in service insurance is a 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. 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 does death in service benefit work?
Death in service insurance is paid out by your employer if you pass away while you’re still an employee. 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. So, if you make £30,000 a year before taxes, and your death in service insurance offers a payment of four times your salary, your loved ones should receive a lump sum of £120,000.
This money can be paid out directly to your chosen beneficiary, or – more usually – 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.
When does death in service cover pay out?
As mentioned above, death in service cover pays out in the event of your death, as long as you are employed by the company offering the benefit at the time. Unlike certain other schemes, the payout does not depend on your death being linked to your work.
Whether you pass away in a work-related accident or have a heart attack at the weekend, your family should receive a payout as per the terms of the death in service policy.
How long it takes for them to get the money will depend on the process put in place by your employer, as well as the preparations you have made. If the payout is paid into a discretionary trust and you have written a nomination letter naming your chosen beneficiary, it could be made in as little as two weeks.
What is the average death in service payout?
Death in service insurance typically pay out between three and five times your annual salary. The amount received will therefore depend on your income as well as the policy terms.
For example, if you earn £40,000 a year before tax and your death in service policy pays out five times your salary, your family will receive £200,000 in the event of your death. If you earn £50,000 and have a policy offering a three times salary payment, they will get £150,000.
You may be able to increase the payout from your death in service policy by forgoing other benefits if your employer offers a flexible benefits package.
Who can claim a death in service payout?
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.
That’s 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 payout?
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 done your paperwork. If everything goes smoothly, it can take just two weeks – hbut 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 quickly if you pass away is therefore to make sure all the paperwork, including a nomination letter – also known as an expression of wishes – is completed.
Will death in service benefit cover my mortgage?
Your loved ones can use a death in service payout to pay off 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. So you can’t nominate your mortgage provider as the recipient of a death in service payout. If you want a policy that does this, you will need to take out separate mortgage life insurance.
Is a death in service payout taxable?
A death in service policy payout is a tax-free lump sum. Companies achieve this by keeping the policy in trust and paying any money to families via that trust, thereby sheltering it from inheritance tax (IHT).
Do I have death in service cover?
Not all companies offer death in service insurance, so if you’re unsure whether or not you have it, the best way to find out is to check with your employer. The HR department should be able to help you with this. If you have an online benefits portal, you can also check there.
Do I need death in service cover?
Death in service cover is a worthwhile benefit to have as it provides protection for your loved ones in the event of your death at no extra cost to you. However, employers are not required to offer death in service cover as part of a benefits package.
If you don’t get it with your job, you may therefore want to consider taking out life insurance to ensure your loved ones can cope financially should you pass away.
Even if you do have death in service insurance through your job, you may want to take out life insurance alongside to ensure your family receives enough money to cover their outgoings if you die unexpectedly.
Do employers have to offer death in service cover?
Death in service benefit is an optional extra that companies can offer their employees, not a legal requirement – so there’s no guarantee your employer will provide it. Receiving it may also be linked to reaching a certain level in the company, or to qualifying for other benefits.
When you leave a company, your death in service benefit generally ends along with your contract of employment. That’s why when you change jobs, you should check the benefits package as well as the salary on offer.
If you don’t get death in service benefit with your new job, you may want to take out – or increase the payout on your existing – life insurance as a result.
Do I need life insurance as well as 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. But with life insurance, you have more control over the amount your family receives.
The money paid out by death in service cover may seem like a lot, but it can be eaten up fast if your loved ones have to pay off your mortgage, and the cost of a funeral can run to thousands of pounds. 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.
So even if you receive death in service benefit with your job, you may want to take out life insurance to top up the amount your family would receive if you passed away. Say you earn £30,000 and have a death in service benefit worth four times your salary – £120,000 – you could take out a life insurance policy worth £180,000 to give a total pay-out of £300,000, or ten times your income.
Taking out life insurance also 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 13 leading providers to help you find the right cover at the right price.