Death in service

What is death in service benefit?

Employers that offer death in service benefits pay out a sum if you die whilst you are employed by them. Your death doesn’t need to occur at work, or as a result of any work-based activity. You just need to be on the company’s payroll when you pass away.

Sometimes, death in service benefits will be connected to your company pension, and so you’ll only receive the associated pay-out if you’re signed up to the pension scheme in question. And if you change job and move to a new employer, you lose the right to any existing death in service benefits that you’re registered for- you’re only eligible when you’re working for the employer in question. Don’t take it for granted that any new workplaces will offer the same payout scheme, as not all companies do.

So, if you do change jobs, always check what policies are available and what you’re eligible for. If necessary, remember to sign up for the company pension scheme. Under some schemes where employees have flexible benefits, it’s sometimes possible to increase the value of your death in service benefit by reducing other benefits.

How does the payout work?

If you pass away and have active death in service cover, then your dependents will get a payout as a tax-free lump sum. Quite often, death in service schemes will pay out to a discretionary trust. So, the company, rather than you, decides to whom the payout goes. This generally shouldn’t be an issue. However, you should talk to your company if you have specific requirements regarding who you want to receive a payout in the event of your death.

How much is a death in service policy payout worth?

Payouts are normally between two to four times your annual salary. So, if you are earning £40,000 a year at the time of your death, then your dependents should expect to receive between £80,000 to £160,000. However, this varies among employers. So, if you know that your company offers a death in service scheme, you should check with them what the exact value of this is.

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

Everyone’s situation is different, but as a general rule, your life insurance policy should pay out around 10 times your annual salary. Therefore, death in service benefits by themselves aren’t really enough to help your loved ones cope financially if the worst were to happen. Just the cost of a funeral alone can be quite high, with the average funeral costing £3,800. In reality, relying on a death in service payment might not provide your family with the best financial protection.

You might want to think about supplementing your death in service cover with a life insurance policy, to make sure your family gets all the financial help that they need. For example, if you earn £40,000 and your death in service benefit scheme offers a payout of £120,000 (three times your annual salary), then you could take out a life insurance policy with a payout of £280,000 to make up the shortfall.

Because you normally don’t need to pay anything to receive death in service benefits, this still works out cheaper than taking out life insurance by itself, with a payout of £500,000. This is because the higher the payout on a life insurance policy, the higher your premiums are.

Can a death in service payout be used for mortgage repayments?

Unlike some types of life insurance, you can’t assign death in service benefits to mortgage repayments if you pass away. Your family could, of course, use the cash for this purpose, but it might be better if you take out a decreasing term life insurance policy in addition to your death in service policy, so you can take care of your mortgage independently.

What are the pros and cons of death in service benefits?

Pros

• Death in service benefits are normally free as part of an employee benefits package.
• The lump sum payout is tax-free.
• You could be entitled to four times your annual salary.
• Having death-in-service benefits means that you can potentially reduce your life insurance premiums.

Cons

• You may not have complete control over who receives the payout if the money is paid into a trust.
• They can’t be used to directly cover mortgage repayments, though your family could themselves choose to use the cash for this purpose.
• If you aren’t a member of the company pension scheme, then you might not qualify.
• You don’t qualify for death in service benefits if you are no longer an employee.
• The death in service payout may not be enough to cover your life insurance needs.