Death in service and life insurance
Many employers will offer what is known as death in service benefit as part of a general employment benefit package, paying out if you die while you are working for the company in question.
However, the nature of death in service cover is such that the pay-out is often much smaller than what you’d get from a life insurance policy, and so it is often worth supplementing it with an independent policy in order to get the cover you need.
In This Guide:
- What is death in service benefit?
- How do death in service policies pay out?
- How much do death in service policies pay out?
- Is death in service a substitute for life insurance?
- Death in service and mortgages
- Should I purchase life insurance as well?
What is death in service benefit?
Employers who offer death in service benefits will pay out a sum in the event on your death, so long as you are working for the company at the time that you die.
Importantly, your death does not need to occur at work or as the result of any work-based activity; you simply need to still be on the company’s pay roll when you pass away.
Sometimes, death in service benefits will be linked to your company pension, and so you will only receive the associated pay-out if you are signed up to the pension scheme in question.
How do death in service policies pay out?
If you pass away and you have active death in service cover, your dependents will receive a pay-out in the form of a tax-free lump sum of cash.
It is important to note here that often, death in service schemes will pay out into a discretionary trust. This means that the company, rather than you, will decide to whom the money goes. This shouldn’t be an issue, but you should check with your company if this is the case if you have particular requirements regarding who exactly you want to receive a pay-out in the event of your death.
How much do death in service policies pay out?
The pay-out associated with death in service benefit is generally between two and four times your annual salary.
So if, at the time of your death, you are earning £50,000 a year from your company, then your dependents can expect to receive between £100,000 and £200,000 from the company.
This does vary from employer to employer though so if you know your company offers a death in service scheme, you should make sure you check with them to ascertain its exact value.
Is death in service a substitute for life insurance?
Of course, all situations are different, but the general guideline is that you should have your life insurance policy pay out roughly 10 times your annual salary.
As you can see, this means that death in service benefits alone are often not sufficient to help your dependents cope financially in the event of your death.
Again, this will depend on your particular situation, but you might want to consider supplementing your death in service cover with an independent life insurance policy in order to make sure your family gets the financial help they need.
So if you earn £50,000, and your death in service benefit scheme offers a pay out of three times your annual salary (£150,000), then you could take out a life insurance policy to the value of £350,000 in order to make up the shortfall.
As you generally don’t have to pay anything to receive death in service benefits, this still works out much cheaper than just taking out life insurance on its own with a pay-out of £500,000.
Death in service and mortgages
It is important to note that, unlike some forms of life insurance, you can’t assign death in service benefits to mortgage repayments in the event of your death. Of course your family could use the cash received towards mortgage repayments, but you might be better off purchasing a decreasing term life insurance policy in addition in order to take care of your mortgage independently.
Should I purchase life insurance as well?
For the above reasons, opening up a life insurance policy to supplement your death in service pay-out is often a good idea.
If you wish to do this, you should compare life insurance quotes with Money Expert to make sure that you’re getting the best deals on the market for your extra cover.