Death in service insurance

You may have a death in service insurance policy through your employer, which is a lump sum paid out if you die while working for the company.

Death in service is a common work benefit and it’s usually included when you start working at a new company. It provides a sum of money for your family if you die while working for the company and this is usually around 3 or 4 times your average annual salary.

This money can be used by your dependants, who you will have to name when you take out the policy, and they can put it towards whatever they like. This could include housing costs such as a mortgage or rent, or just everyday household expenses.

This kind of insurance is not the same as life insurance. A life insurance policy is taken out separately and usually pays a much bigger sum of money out when you die.

Here we explain the difference between death in service and life insurance, how it works, why it might be useful, and what the best alternatives are.

What is death in service insurance?

If you die while working for a company and you have death in service insurance, the insurer will pay out a lump sum of money to your named beneficiaries. This is a tax-free sum of money of around 3 or 4 times your salary. 

For example, if you earn £35,000 a year, the sum of money could be around £140,000. This can be used by your dependants to go towards the things your income would have helped with, although they are free to spend it how they like.

This kind of insurance, as with life insurance, is a way to provide some protection to your dependants if you die while they are still financially reliant on you. For example, you may have young children and want to make sure there is some money for them to pay for living costs, or to cover their education fees. These policies can also be used to cover big expenses such as mortgage costs.

Why do you need death in service insurance?

Death in service insurance policies can be used to provide protection to family or loved ones if the worst happens and you die. 

These policies aren’t suitable for everyone, and typically are taken out by those who have other people who are financially dependent on them.

If you’re single and have no dependants, for example, it might not be worth you taking out a policy if there’s no one you think that might need the money.

However, if you’re able to take out the policy it can be a good way to provide a little extra money to your loved ones - and there’s often no cost for taking it out.

The money may not be enough to cover your family’s outgoings forever, but it could help them for at least the next 3 or 4 years. You could also take out a separate life insurance policy to cover the rest of the shortfall. 

For example if you have very young children and you want to provide money for them until they reach the age of 18, you could take out both policies as just death in service is unlikely to provide enough money.

How does death in service work?

With death in service insurance, you don’t choose the type of policy you take out, or the amount of money that will be paid if you die. 

If you were to die while working for the company, the money is usually paid out to a discretionary trust, rather than being transferred directly to your dependants.

These are often run by the company you work for, or by someone nominated by them. When you set up the insurance you can state where you want the money to go and the trustees will have the final say of how this happens. 

On the whole whatever you’ve decided upon when you take out the insurance will have to be adhered to, but unlike life insurance, you can’t state that you want the money to go towards a mortgage payment. Instead you need to name the person (or persons) you want to receive the cash.    

If your death in service insurance policy works with a trust, you will need to fill in a document when you take it out to express where you want the money going. This is then used by the trustees if you die to process the lump sum.

It will usually take around 30 days for the money to be released to loved ones after someone dies. 

Who is eligible for death in service insurance?

To take out one of these policies, most companies will require you to have worked for them for a certain period. This will depend upon the company so if you’re unsure, check with the human resources team at your job. 

You may not automatically be covered, and not all companies will even provide this insurance, so don’t assume you have the cover. When you sign your contract, you will usually be given information on how to apply for a policy, and what you need to do to sign up.

What’s the difference between death in service and life insurance?

Death in service and life insurance are not the same policies. It is possible to have both at the same time but they provide different types of cover.

Death in service: 

  • This cover only lasts while you’re at the company providing it

  • The amount paid out is up to 4 times your average salary

  • You usually don’t pay extra for having death in service, as it’s an employee benefit

  • The money is tax-free

  • When money is paid out, it’s often paid into a trust, and your dependants are paid an income from this

Life insurance:

  • You decide how long you want the policy to last for

  • The amount of money paid is set by you when you take out the policy

  • There is a monthly premium to pay with any life insurance policy

  • As life insurance money is seen as part of someone’s estate, in some cases there may be tax to pay on it

  • You decide where the money is paid out and who receives it

What are the advantages and disadvantages of having death in service?

With any insurance product, it’s important you fully understand the benefits and drawbacks before taking out a policy. You also need to find a policy that suits your needs, one which will benefit your family, and one which isn’t too expensive for you to pay.

While every policy is different, and the small print will give details about how it works, the following apply to most:

Advantages of death-in-service insurance

  • Your dependants will get a lump sum of money if you die while working at the company

  • The money will be between 3 and 4 times your annual average salary

  • You usually don’t have to pay for the policy as it’s included as an employee benefit

  • There’s no tax to pay on the lump sum

Disadvantages of death in service insurance

  • The amount of money paid out might not be enough to protect your family

  • There’s little flexibility with a policy and you can’t choose the cover amount

  • If you leave the company, the cover will automatically end

Alternatives to death in service

There’s nothing stopping you taking out a death in service policy and a life insurance policy. If you take out a life insurance policy, there are more options to choose from. These include taking out a policy to specifically cover your mortgage costs, or one which pays out a set lump sum if you die within the term of the policy.

If you don’t want to take out the death in service policy, you could also set up a savings account for your loved ones. This would require putting a certain amount of money away each month, which will then be available to them to pay for outgoings if you were to die when they are reliant on this money.

The drawbacks here are that you are unlikely to get a decent interest rate, and the overall amount of money may be less. There may also be tax to pay on the money if it forms part of your estate and this amount goes over the current inheritance tax threshold. Read our guide to life insurance tax to find out about how inheritance tax works.

15th September 2020