Death in service vs life insurance

28 February 2020

4 min read

Emma Lunn Personal Finance Journalist
Emma Lunn

Personal Finance Journalist

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Death-in-service payouts are calculated in a different way to life insurance, so it’s important to understand how this type of insurance works and whether it will be sufficient for your family’s needs.

If your employer offers death-in-service as an employee benefit, you might question whether you also need life insurance.

 

What is death-in-service

Death-in-service is an employee benefit which pays out a tax-free lump sum if you are 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 pay out, you just need to be on the payroll.

A death-in-service payout is usually between two and four times your annual salary. Some firms offer this benefit to all employees, while other employers only offer it to members of the company pension scheme. It’s sometimes known as ‘group life assurance’. 

One advantage of death-in-service is that you won’t have to pay a monthly or annual premium for cover, as your employer pays for it. There’s usually no need for medical underwriting, and your company’s HR department will do all the paperwork.

 

What is life insurance?

A life insurance policy pays out a lump sum, or regular income, to your beneficiaries if you die during the term of the policy. Some policies also pay out on the diagnosis of a terminal illness.

When people take out life insurance, they normally buy an amount of cover that would pay off their mortgage and help with other family expenses. These might include household bills, childcare costs, university fees and contributions to children’s weddings. You can assign a payout specifically to a mortgage or a particular loan and decide who in your family will get the money.

Life insurance premiums are paid either monthly or annually. How much it costs depends on the amount of cover you take out, your age, your lifestyle and any pre-existing health conditions. The policy will remain in place as long as you are paying your premiums. 

 

Do I need life insurance if I have death-in-service?

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

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.

In some cases 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.

You will only qualify for death-in-service while you are employed by the company. 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.

Most people who have death-in-service as an employee benefit will benefit from having life insurance too. One option, if money is tight, 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 cannot afford life insurance, death-in-service is certainly better than no cover at all.

Biography

Holly Thomas is an award-winning freelance financial journalist and former Deputy Money Editor at The Sunday Times. Her work can be seen in national press including the Daily Mail, The Times, and the Daily Telegraph.