Death in Service vs Life Insurance

Find out how death-in-service might affect your life insurance premium.

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Some employers offer death-in-service as part of its employment benefits package. Read more on how your premium might be affected.

What is death-in-service?

Death-in-service is an employee benefit which pays out a tax-free lump sum if you are employed by the company at the time of your death. The pay out is usually between two and four times your annual salary.

So, if you earn £30,000 a year, your family could expect a tax-free sum of between £60,000 and £120,000. 

You don’t have to die while at work, or as a result of a work activity, you just have to be on the payroll.

How can I find out if I have death-in-service cover?

Death-in-service can be a valuable benefit, but some employers are more generous than others, so you should check out exactly what’s on offer – if anything. Contact your human resources department for more information. The benefit is also often linked to the company pension, so you would have to be a member of the pension scheme to qualify for any death-in-service pay out.

Who gets the tax-free cash from a death-in-service pay out?

The tax-free cash from death-in-service benefit can help your dependents cope financially after your death. However, the money is sometimes paid into a discretionary trust, which means the trustees have the final say over who gets the cash.

Your wishes will be taken into account, assuming you have written an expression of wishes or a nomination of benefits letter, but the trustees have the final say.    

It’s also worth bearing in mind that death-in-service benefit cannot be assigned to a mortgage, though your family could use the money to pay down any mortgage debt.

Do you need life insurance as well as death-in-service?

Some people assume they don’t need life insurance if they have death-in-service benefit, but if you want to link your life policy to your mortgage, or you want to specify the beneficiaries, it’s worth taking out separate life insurance.

You might also need additional life cover if the death-in-service pay out would leave your family struggling to cope financially.

Most advisers recommend life cover of about ten times your income – a lot more than the typical death-in-service pay out.

In other words, you might need to top up the death-in-service benefit with separate life insurance.

For example, if you earn £30,000 a year and have death-in-service benefit of four times your salary, you could expect a pay out on death of £120,000.

You might therefore want to arrange additional life cover of £180,000 to give a total pay out of £300,000, or ten times your earnings.

Topping up your life cover in this way should result in cheaper premiums because you are only buying £180,000 of cover instead of £300,000.  

Don’t forget that you only qualify for death-in-service if you are employed by the company. If you change employers, take a break from work or set up as self-employed, you lose the right to the tax-free sum. You might therefore need to make appropriate provision for any dependents.

Read: How to work out how much life insurance cover you might need

Pros and cons of death-in-service benefits

Pros

  • Death-in-service is usually free as part of a benefits package.
  • The lump sum pay out is tax free.
  • You could be entitled to four times your annual salary – or even more.
  • You can take your death-in-service benefit into account when buying life insurance, so hopefully reducing the premiums

Cons

  • You might not have total control over who gets the tax-free pay out
  • If you are not a member of the company pension scheme, you might not qualify
  • You do not qualify for death-in-service if you are no longer an employee
  • The death-in-service pay out might not be enough to cover your life insurance needs

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