Death in service benefit ‒ is it enough?

27 July 2020

5 min read

John Fitzsimons
John Fitzsimons

Personal Finance Journalist

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A common employee benefit is death in service. But what is it and what does it mean for your life insurance needs?  

Employees often enjoy all sorts of perks of employment, beyond simply their monthly salary. For example, some employers are more generous when it comes to pension contributions, while others operate loan schemes for train season tickets. Some other employers offer death in service benefit.

 

What is death in service benefit?

Death in service is a payout made by your employer to your loved ones should you die while an employee of the firm.

You don’t need to die while you’re actually at work either. For example, it’s not dependent on your passing away at your desk, but rather simply while you are employed by the business.

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 is death in service paid out?

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 is 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 pass away, for example through a nomination of benefits letter. But ultimately, the trustees will have the final say.

This may be beneficial too. It could be that your situation has 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?

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

While some schemes are open to all employees, others are tied to the firm’s pension scheme. As a result, unless you are a member of the scheme, you won’t be eligible to receive a payout should you die while an employee.

 

Paying off the mortgage

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 issues down the line.

 

Check the terms and conditions

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.

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.

 

Do I still need life insurance if I have death in service benefit?

If you have death in service benefit from your employer, it’s understandable to question whether you really need a separate life insurance policy.

However, it’s generally a good idea to have life insurance cover alongside your death in service benefit.

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.

There’s also the fact that very few of us stay in the same job for our entire working lives. So while you may have a generous scheme in place currently, you could move to a new job with a better salary but which has smaller death in service protection, or even, no cover at all.

Having a dedicated life insurance policy protects you against that variance, ensuring that your loved ones are financially protected in all eventualities should you pass away. Any death in service payout can then be viewed as a bonus.

Biography

John Fitzsimons has been writing about money for more than a decade, as editor of the B2B magazine Mortgage Solutions and then personal finance website loveMONEY. Since going freelance, he has written for the likes of the Sunday Times, Forbes, the Mirror, the Sun, and Moneywise.