Death in service insurance

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

Faith Archer
Insurance expert
8
minute read
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Last Updated 3 NOVEMBER 2022

What is death in service insurance?

Death in service insurance is a type of occupational life cover that may be offered as a benefit by the company you work for. A death in service policy pays out a tax-free lump sum if you’re on the payroll of that company when you die.

Death in service benefit is often linked to company pensions, so you might only be eligible if you’ve signed up to your company’s pension scheme.

If you’re offered death in service cover, you might need to give the name of your beneficiaries – the people you want the lump sum to be paid to if you die. They’re usually close family members like your spouse, partner or children.

Unlike life insurance, death in service (DIS) is only valid while you’re in the service of the employer that offers it. This means your cover ends if you leave the company. So, if you lose your job or move employers, you’ll no longer be protected.

How does death in service work?

Companies aren’t legally required to offer death in service cover, but many include it 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 benefits, you just need to be on the payroll to be covered. In some cases, though, you may need to join the company’s pension scheme to be eligible for the DIS benefit.

The pay-out your beneficiaries receive depends on the type of death in service package – 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 would be £200,000.

Who gets the death in service payment?

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

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 be paid the death in service benefit from the trust.

In these cases, it’s vital to fill in an ‘expression of wish’ or ‘nomination of benefit’ paperwork, saying who you’d like the money to go to. Although the trustees (usually the company you work for) still have the final say, your wishes should be taken into account.

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

The time it takes 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 they have your nomination of benefit form on file, 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 if you die while employed depends entirely on the terms and conditions set out by your employer. Usually, the pay-out amounts to 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 salary cut. Or you could reduce or even ditch other benefits to get a higher death in service payment.

Is death in service taxable?

No, death in service is placed in a trust so the taxman won’t get a cut.

This works in the same way as putting your life insurance in trust. When something is written in trust, it’s not counted as part of your estate (everything you leave when you die, like your home, money and other possessions). This means that the pay-out is not subject to inheritance tax. It also means that your family should receive the lump sum sooner, as there’s no need to wait for probate (the legal process of sorting your estate).

What should I consider with death in service cover?

While you may be happy to accept death in service cover as part of your employee benefit package, it’s important to weigh up the pros and cons:

Advantages of death in service:

  • Unlike life insurance, you don’t have to pay a premium – death in service is typically provided at no cost to you
  • Death in service benefit is tax-free
  • As long as you remain employed by the same company, you’ll be covered in the event of your death, even if it’s not work-related
  • Your family could receive a large lump sum to ease their financial burden if you die.

Disadvantages of death in service:

  • You’ll lose your death in service cover if you change jobs
  • Not all employers offer death in service benefit
  • While you can name the beneficiary, it’s only a request, not an obligation, so your trustees could technically decide who the money goes to
  • You can’t usually earmark the death in service pay-out to cover mortgage payments
  • Your pay-out is normally worked out as a multiple of your salary, so depending on how much you earn, it might not be enough to cover your family’s needs in the future.

Death in service vs life insurance: what’s the difference?

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

With life insurance:

  • You get to choose how much you want your beneficiaries to receive and the number of years you want protection.
  • You have more control over a life insurance policy – for example, you can put it in trust and choose your own trustees and beneficiaries, or take out a policy to specifically cover your mortgage.
  • You’ll be covered for the length of the policy, no matter where you work.
  • You can get cover even if you’re not the family breadwinner.
  • You and your spouse or partner can choose to take out single cover for each other or a joint policy together.
  • You can shop around and compare life insurance policies to find a better deal.
  • Your insurance provider decides whether to offer you a policy or not, based on questions about your lifestyle.
  • It becomes more expensive the older you get.
  • Premiums can be a lot higher if you have pre-existing conditions.

With death in service:

  • Acceptance isn’t determined by your health and lifestyle.
  • You don’t pay premiums – it’s a free benefit from your employer.
  • Your employer gets to decide the policy type and the pay-out amount.
  • You don’t get to choose death in service trustees.
  • Death in service ends when you leave the company.
  • Only you will be covered – there’s no option to cover your spouse or partner.

Death in service benefit vs life insurance: which is better?

Death in service is a free benefit, whereas you have to pay for life insurance. That said, death in service doesn’t offer the flexibility or options that a life insurance policy can.

Death in service also ends if you leave your job. With life insurance you don’t even have to be employed to take out a policy. If COVID-19 has taught us anything, it’s that life is uncertain. Long gone are the days when a job was for your entire working life. It’s likely you’ll change employers more than once over the years, and there’s no guarantee that your next employer will offer a death in service benefit.

You might prefer to think of death in service as a bonus, and take out additional life insurance to provide your loved ones with extra financial protection if you die. And if you subtract the death in service benefit amount when calculating your life cover, it could help to lower your insurance premiums.

Top tips to make the most of your death in benefit service

Death in service is a valuable perk should the worst happen – and what’s more, you don’t have to pay a penny.

To make the most of death in service cover:

  1. Work out how much the pay-out would be if you died.
  2. Calculate how much your family would need to cover the mortgage, household bills, childcare costs and even uni fees.
  3. Think about how long you intend to stay in your current job and whether going self-employed or giving up work to bring up children is a possibility in the future.
  4. Get a quote for any extra life insurance you might need. Remember, the younger and fitter you are when you start life cover, the cheaper it will be.
  5. It may be that a combination of death in service and life insurance is the best way of securing your family’s financial future. 

Frequently asked questions

Will death in service benefit cover my mortgage?

You can’t directly request that 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, consider taking out a mortgage life insurance policy. This will provide a lump sum for your family to pay off the mortgage.

Does death in service benefit form part of my estate?

No, death in service usually goes into a discretionary trust. Once something is put in trust, it no longer belongs to you and, instead, falls under the care of a trustee – in this case, usually your employer. While it’s more than likely the money will still go to your immediate family, it’s best to put your wishes in writing anyway.

Is death in service benefit compulsory?

No, there’s no legal requirement for employers to offer death in service benefit. It’s up to the individual employer to decide whether to offer it or not.

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

Ask your company’s HR department if death in service cover is included in your benefits package. In some cases, death in service is linked to the company pension scheme, so if you’re not signed up to that then you won’t be covered.

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 with that company 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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