Death in service benefit explained

What is death in service benefit?

Death in service is a workplace benefit that pays out if you die while employed by the company. Your employer can make this payment directly to your family or to a trust, whether you die at your place of work, or outside it. All that matters is that you’re employed by the company when it happens.

Not all employers offer a death in service benefit, as it’s an additional extra rather than a legal requirement. It can also be offered in different ways. For example, some employers tie it to their workplace pension scheme.

How much does death in service pay out?

Death in service payments are generally paid to you family as a tax-free lump sum. The amount is calculated as a multiple of your annual salary.

For example, your family could receive a payment of three or four times your typical salary. Keep in mind that the exact amount can change depending on the employer and the industry you work in.

How is death and service paid out?

This depends on how your employer operates its death in service benefit. If you die while still on the company’s payroll, the money will either be paid directly to a person you’ve nominated (sometimes referred to as your ‘beneficiary’), or paid into a trust.

You can choose who you want to receive the money by completing a nomination of benefits letter. It’s worth noting that if the money is paid to a trust, the trustees will have the final say on this - even if you’ve already nominated a beneficiary.

What happens if the money goes to a trust?

There are potential benefits if this happens. Your personal situation might have changed since you started working for your employer, so the trustees can make an informed decision about who should get the money. They’ll do this based on the most recent information they have about you.

For example, your situation may change if you get married, have children, separate from a partner, or get re-married.

You don’t have to nominate someone to receive your pay out, but it does help you have more control over the money goes. Our guide to nominating beneficiaries has more information about why this is important.

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

You can have both at the time, but it’s important to remember that death in service doesn’t protect your family in the same way as life insurance.

There are a few pros and cons to death in service cover that can help you decide whether it’s right for you. They can also help you compare it against your current life insurance policy, as there are some big differences you should be aware of.

Advantages of the death in service benefit:

• You don’t need to pay a monthly or annual premium for death in service cover, as your employer pays this for you
• There’s no need for any medical underwriting, as your company’s HR department will do all the paperwork
• If you die while employed by the company, a tax-free lump sum can be paid out to your nominated beneficiaries
• It can give you peace of mind that your family will have more financial security if you die.

Disadvantages of the death in service benefit:

• Death in service pay outs tend to be smaller than life insurance pay outs
• You may not be in the same job forever, so you might lose your cover or move to a less generous cover if you change employer
• Pay outs are linked to your salary, and may not be enough to support your family after you’re gone
• The lump sum will be paid into a discretionary trust, which means that it might not go to the family members you’ve nominated
• Some employers only offer the death in service benefit if you’re a member of their workplace pension scheme
• You’ll lose your death in service benefit if you move jobs, or if your employer goes into administration.

Keep in mind that death in service cover will pay out on top of your life insurance policy, so there’s no harm in having both.

Not all life insurance policies are the same. You can read our guide to the different types of life insurance to help you find the right kind of cover for you.

Am I eligible for death in service?

This depends on your employer’s terms. Some companies will make their death in service benefit available to all employees, while others will only offer it to members of their workplace pension scheme.

If you’re interested or want to check if you’re eligible, it’s worth asking your employer or checking your employment contract.

What to know if you have a mortgage

If you have a mortgage, there are some differences between death in service and life insurance you should be aware of.

With life insurance, you can request that a part of a pay-out is used to clear a portion of your outstanding mortgage balance - before the rest goes to your chosen loved ones. This can be helpful as it takes some of the burden off your family to clear the mortgage after you’re gone.

You can’t do this with death in service cover. While your loved ones may receive a pay out if you die, there’s no guarantee they’ll use it to pay off a portion of the mortgage – which could lead to further financial complications in future.

Our guide to mortgage protection life insurance has more details you might find useful.

Always check the terms and conditions

It’s important to check your employment contract carefully. It will help you confirm if you have death in service cover, and help you understand how your cover works.

Death in service schemes can vary, from the level of cover offered, to how the money is paid out. This is why it’s important to understand how you’re covered.