Does your employer offer death-in-service benefit as part of your employment benefits package?
If so, you might think you can do without life insurance. But you should think again. If you rely solely on the cover from your employer, your family could struggle to cope financially after your death.
For most employees, death-in-service benefit usually pays out a tax-free lump sum if you die while employed by the firm. Your death does not have to be work-related, but you must be on the payroll when you die.
In addition, many death-in-service policies are linked to a company pension. In this circumstance, you must be an active member of the pension scheme at the time of your death.
Death-in-service benefit is not necessarily a substitute for your own personal life insurance arrangements
The size of the pay-out varies from scheme to scheme, with some companies offering two times your annual salary and others paying a more generous four times.
Let’s say your employer pays death in service benefit of four times your annual salary. If you earn £40,000 and you die while employed by the firm, your family could receive a tax-free lump sum of £160,000.
You don’t normally pay for death-in-service benefit and it can be a valuable addition to your remuneration package. It can also dovetail with a separate life insurance policy not connected with your employment. For example, if you need total life insurance of £500,000 but your employer offers death in service benefit of £200,000, you might decide to buy only £300,000 of life cover.
But it’s important to remember that death-in-service benefit is not necessarily a substitute for your own personal life insurance arrangements.
First, the benefit stops as soon as you stop working for the firm. If you have no other life insurance in place, your family could therefore be vulnerable if you switch jobs, are sacked or made redundant.
And if you then want to buy your own life insurance policy, you might have to pay a higher premium as you will be older and perhaps in poorer health.
10 x salary
Death-in-service benefit is also unlikely to cover all your life insurance needs. Advisers tend to recommend life insurance of up to 10 times your annual salary, way above the maximum death-in-service pay-out. But, of course, your actual sum insured will depend on your own circumstances and requirements.
Link to mortgage
You should be aware, too, that you cannot assign death-in-service benefit to a mortgage. So if you want to link your life insurance to your home loan, you will need to buy your own cover. Some death-in-service pay-outs also go into a discretionary trust, which means you cannot dictate exactly who will receive the money when you die.
Separate, stand-alone life insurance is much more flexible than death-in-service benefit. You can decide how much cover you need, the length of the term and the beneficiaries.
Plus, there are different types of policy. For example, you might choose decreasing term insurance to run alongside your mortgage, so the pay-out gets gradually smaller in line with your dwindling debt (with the premiums correspondingly lower as a result).
Life cover also remains in place when you change jobs or are out of work, as long as you keep up the premiums.
Premiums for life insurance can start from as little as £5 a month – and one of the best ways to find a suitable policy is MoneySuperMarket’s online comparison service. We can help you find the right policy at the right price.