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.

Mubina Pirmohamed
Life insurance expert
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Posted 27 JANUARY 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 can pay out a lump sum of up to five times your salary if you die while in their employment.

You have to be on the payroll at the time of death to qualify for a payment. Unlike life insurance, death in service cover ends if you leave a company. If you lose your job or move employers, you’ll no longer be protected.

How does death in service benefit work?

If you have death in service benefit as part of your employment package, it will pay out a tax-free lump sum if you die while still an employee of the company. It doesn’t have to be a work-related death; as long as you’re on the payroll for that company, you’ll be covered.

Although the money from death in service benefit is intended for your family, dependants or another person you choose (these are called beneficiaries), in many cases 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 will have the final say, your wishes should be taken into account.

The amount of money your beneficiaries should receive 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.

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 to 30 days for your loved ones to receive the pay-out.

Do companies legally have to offer death in service cover?

No. It’s something many companies include in their benefits packages, but it’s not a legal requirement.

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. However, there are a few things to think about, including:

  • 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 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. You could reduce or even remove other benefits to see a higher pay-out from death in service.

If I have death in service cover, does that mean I don’t need life insurance?

Not necessarily. Although a payment of three to five times your salary can look generous at a first glance, you’ll need to know how long that sum will keep your family or dependants protected. Plus, there’s the issue of whether your job is stable. If you lose it or leave the company, you’ll lose your death in service.

Also, 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 you have 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.

Remember, each policy will be different so it’s crucial that you read the terms and conditions carefully. It may be that a combination of life insurance and death in service is the best way of ensuring the financial future of the people you love.

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.

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