Death in service cover

Death in service cover pays out a lump sum if you die while employed by your company. Learn about how death in service benefit can help your family and find out how it differs from life insurance.

Death in service cover pays out a lump sum if you die while employed by your company. Learn about how death in service benefit can help your family and find out how it differs from life insurance.

Debbie Thompson
Life insurance expert
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Posted 5 OCTOBER 2021

What is death in service insurance?

Death in service insurance is a type of cover that can be offered as a benefit by the company you work for. It’s a tax-free lump sum that’s paid out if you’re on the payroll of the company at the time of your death.

Unlike life insurance, death in service cover ends if you leave the company. If you lose your job or move employers, you’ll no longer be protected.

How does death in service benefit work?

Companies aren’t legally required to offer death in service cover, but it’s something many include in their benefits packages.

There’s no annual or monthly premium to pay and your death doesn’t have to be work-related. In most cases, if your company offers death in service benefit, you just need to be on the payroll to be covered.

The payout your beneficiaries get depends on the type of death in service package you have – in most cases, it’s based on the amount you earn. For example, if you earn £40,000 a year before taxes and your death in service benefit is five times your salary, the lump sum pay-out on your death should be £200,000.

Who receives the death in service payout?

The money from death in service benefit is intended for your family, dependents or another person you choose (these are called beneficiaries). In most cases, though, it will first go into a discretionary trust.

A discretionary trust prevents the pay-out from being liable for inheritance tax. This means that rather than directly receiving the money, your beneficiaries will get the death in service benefit from the trust.

In these cases, it’s a good idea to write a ‘nomination of benefit’ letter expressing who you’d like the money to go to. Although the trustees (usually the company you work for) will have the final say, your wishes should be taken into account.

How long does death in service benefit take to pay out?

The time it will take for your beneficiaries to receive the money depends on your employer and the process they have in place. If the benefit is paid into a trust and the nomination letter expressing your wishes has been received, it should be fairly straightforward. If all the paperwork is complete, it can take between two weeks and 30 days for your beneficiaries to receive the pay-out.

What is the average pay-out for death in service?

That depends. The amount paid out in the event of a death in service depends entirely on the terms and conditions set out by your employer. Often, you can expect a pay-out to be around three to five times your annual salary.

If your employer offers a flexible benefits package, you may be able to increase the death in service pay-out by taking a reduction in salary. Or you could reduce or even remove other benefits to get a higher death in service payment.

What should I consider with this type of insurance?

Unlike life insurance, you won’t usually have to pay a premium for your death in service benefit – it will come as part of your benefits package. But there are a few things to think about:

  • Your pay-out is normally worked out as a multiple of your salary – so be sure the lump sum is enough to cover your family’s outgoings in the future. With life insurance, you choose the pay-out amount.
  • You may not know who’ll get the lump sum if you die, as it may fall under a discretionary trust.
  • You can’t usually earmark the pay-out to cover mortgage payments.
  • Since death in service is a benefit, the full details will vary depending on your employer.

What’s the difference between death in service and life insurance?

While both types of cover can offer valuable financial support for the people you love, there are notable differences:

  • With death in service cover, your employer decides the pay-out amount – with life insurance, you get to choose how much you want your beneficiaries to receive.
  • You have more control over a life-insurance policy – for example, you could write it in trust and choose your own trustees and beneficiaries, or you could take out a policy that pays off your mortgage – with death in service, your employer is the trustee, and they have the final say.
  • Death in service cover ends if you leave the company – life insurance will cover you for the length of the policy, wherever you choose to work.
  • Death in service only covers you, not your spouse or partner – with life insurance, you can choose to take out single cover for each of you, or a joint policy together.
  • With life insurance you can choose the type and length of cover you want – for example, whole of life cover which guarantees a pay-out when you die, whenever that is, or decreasing term life insurance which reduces in line with your mortgage.
  • Unlike life insurance, you don’t need to go through underwriting to get death in service benefit – underwriting means the insurance provider decides whether to offer you a policy or not based on questions about your health and lifestyle habits.

Top tip

It’s worth keeping in mind that by not having life insurance today, you’re at risk of higher payments in the future if you take out a policy later in life.

People often face higher costs for life insurance as they age. That’s particularly true if there are health conditions you’ve suffered from before you bought your life-insurance policy. Learn more about pre-existing medical conditions and how they could potentially affect life insurance.

It may be that a combination of life insurance and death in service is the best way of ensuring the financial future of your family.

Frequently asked questions

Will death in service benefit cover my mortgage?

You can’t directly request that the death in service benefit is used to pay off your mortgage. It will be up to your beneficiaries to decide what to do with the money once they receive it.

If you want to make sure that your mortgage payments are covered if you die, you might want to consider taking out a mortgage life insurance policy. This will provide a lump sum that your family can use to pay off your mortgage.

How do I find out if I have death in service cover?

You should find out if your company offers death in service cover, as not all do. In some cases, death in service will be linked to the company pension scheme, so if you’re not signed up to that then you won’t be covered. Talk to your company’s HR department. They’ll be able to explain what benefit packages are available and what you’ll be eligible for.

Do I need both death in service and life insurance?

While death in service could be a valuable perk, the pay-out might not necessarily be enough to support your family should they need it. And even if you have no intention of leaving your job, there’s no guarantee you’ll stay there until you retire.

Life insurance could offer the extra financial support your family may need. If you have death in service benefit, it could also bring down the cost of a life insurance policy, as you’ll need less cover.

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