Death in service benefit: is it right for you?

What is death in service benefit?

Death in service is an employee benefit that pays out a tax-free lump sum if you’re employed by the company at the time of your death. You don’t have to die while physically at work for a death in service benefit to payout, you just need to be on the payroll.

Death in service benefit is generally paid as a tax-free lump sum and is calculated as a multiple of your annual salary. For example, the benefit may mean your partner receives a payout of three or four times your typical salary, though the exact amount can vary significantly between employers and industries.

How does death in service work?

This will depend on how your employer operates the benefit. In some cases, the money will be paid directly to your loved ones, but in other cases, it's paid into a trust.

The trustees then decide precisely where this money is paid out. You can set out who you want to receive the money should you die, for example, through a nomination of benefits letter. But, ultimately, the trustees will have the final say.

However, this may be beneficial, as your situation could have changed since you initially started working at the company. So, the trustees can act on more up-to-date information they have about you, for example, if you have separated from a previous partner and remarried.

Am I eligible for death in service?

Your eligibility for death in service benefit will depend on the terms of your employer’s scheme.

While some death in service policies are open to all employees, others are tied to the firm’s pension scheme. As a result, unless you’re a member of the scheme, you won’t be eligible to receive a payout should you die while an employee. This is often known as ‘group life assurance’. 

It’s important that you check your employment contract carefully, not only to establish whether you actually have death in service cover, but to understand how your cover works and the guidelines to meet. Schemes vary, from the level of cover on offer, to how the money is paid out so it’s important that you fully understand your protection from the outset.

Advantages of death in service

• If you‘re on the payroll, you are guaranteed a death in service payment
• It can provide peace of mind and financial security for loved ones should you die
• The cash lump sum paid out by your employer is tax-free
• You don’t have to pay a monthly or annual premium for cover as your employer pays it for you
• There’s usually no need for medical underwriting, and your company’s HR department will do all the paperwork.

Disadvantages of death in service

• The payout from a death in service benefit tends to be smaller than that of a life insurance policy
• Payouts are linked to your salary, not how much money your family might need in your absence
• Sometimes the cash sum will be paid into a discretionary trust, meaning you will not necessarily have a say in who the money gets paid to
• Not all companies offer death in service benefit
• Some employers only offer it if you’re a member of their pension scheme - if not, you’re not eligible
• If the company goes into administration or you move jobs, you lose this benefit and won’t get a pay out.

Is death in service the same as life insurance?

No. If you have death in service benefit from your employer, it’s understandable to question whether you really need a separate life insurance policy. Most people who have death in service as an employee benefit will benefit from having life insurance too.

Death in service is a useful benefit, but it may not protect your loved ones in the same way life insurance does.

For example, even if you have a generous employer, the payout from the death in service cover may not be enough to pay off your mortgage in its entirety. And even if it does, it may leave your loved ones with only a small amount left over to cover the various other costs they will have to deal with after you die - from your funeral, to getting by without your regular income.

In addition, you will only qualify for death in service while you are employed by the company, and very few people stay in the same job for their entire working lives. If the company goes bust, you change jobs, or leave to set up as self-employed, you’ll lose this benefit. Don’t assume that any new employer will offer death in service, as not all companies do.

Having a dedicated life insurance policy protects you against these changes, ensuring that your loved ones have some financial protection in all eventualities should you die. Any death in service payout can then be viewed as a bonus.

One option, if your income falls, and before cancelling an existing life insurance policy altogether, is to effectively ‘top up’ your death in service cover by taking out a smaller amount of life insurance than you would have done if you were relying on life insurance alone. However, if you can’t afford life insurance, death in service is certainly better than no cover at all.

Is life insurance better than death in service benefit?

Specific life insurance policies have significant benefits over death in service cover. One key difference between death in service cover and a traditional life insurance policy is the way that it interacts with your mortgage.

With a life insurance policy, you can specifically request that it be used to first pay off your mortgage, before the remainder goes to your loved ones. This is important as it means that what is likely the biggest debt for your loved ones to worry about, is entirely taken care of immediately.

You can’t do this with death in service cover. So, while your loved ones may use the money to pay the mortgage off, there’s no guarantee that they will, which might lead to further financial issues down the line.