Death-In-Service Benefit vs Life Insurance
What is a death-in-service benefit? Learn how it works, how it's calculated, and whether you need life insurance if you have a death-in-service benefit.
Key takeaways
- Death in service benefit is a life insurance payout provided by employers to their employees, offering financial support to beneficiaries if the employee dies while still employed, typically amounting to a multiple of their salary.
- The payout amount is usually between two to four times the employee's annual salary, and employers can set different levels of cover based on job role or age.
- Death in service benefits are generally held in trust, making them exempt from income tax and inheritance tax, which allows for quicker payouts directly to beneficiaries without going through probate.
- Unlike personal life insurance, death in service benefits do not require premium payments from employees.
- Death in service benefits are only valid while the employee is on the payroll. Cover ends if the employee leaves the company.
Death in service benefit is a life insurance payout provided by employers for their employees. It’s often part of a wider employee benefits package that may include private health cover as well. Death in service is also known as group life insurance or group life assurance.
If you die while you're employed by your company, your loved ones will receive a lump sum payout. The amount is usually a multiple of your salary. And you can often choose who receives the money.
In this article we’ll talk about how death in service works, how it’s calculated and how it’s different to personal life insurance.
What does death in service mean?
Death in service is a payment made by your employer to your loved ones if you die when you’re still employed by them. It works like a life insurance payout, but you don't have to pay monthly premiums. Your employer covers the cost. Sometimes, your employer will require you to be part of the company pension scheme to get the benefit. You can check this with your HR team.
If you do have death in service benefit, you’ll be asked to choose who should receive the payment. These are your beneficiaries. They’re usually close relatives, like your spouse or children. They can choose what they do with the money, but it can help towards paying for your funeral expenses for example.
Your death doesn’t need to take place at work or be work-related. You just need to be on the payroll of the company providing the death in service benefit when you die.
There’s no legal obligation for employers to offer a death in service benefit. However, many companies do as a way of helping families financially if they lose a loved one’s income.
How is death in service calculated?
The amount your beneficiaries receive depends on how your employer has set up the plan. But it’s usual for employers to pay out up to four times your annual salary. So, if you get paid £25,000 a year and your employer pays four times your annual salary as a death in service payment, your loved ones will receive £100,000.
Employers can also choose to have different levels of payment depending on your job role or age. For example, they may provide a four times annual salary payout for senior managers, but only two times annual salary for junior employees. They can also choose whether overtime, bonuses and commission are taken into account in the calculation.
Is death in service taxable?
Death in service policies are usually held in trust. This means they’re not subject to tax, such as income tax or inheritance tax in the UK.
A trust is a legal arrangement that’s run by a group of trustees. The trustees are the policy's legal owners. This means the policy doesn’t belong to you, so it sits outside of your estate. As part of the trust, you can request that certain people, such as your family, receive the payout. Although the trustees can ultimately decide who receives the payment, they will usually follow your wishes.
How long does it take to pay out death in service?
A death in service payment is usually made within 30 days, but if all the paperwork is in place it can be as quick as two weeks.
Your loved ones will need to let your employer know that you have died. And they may have to provide a copy of the death certificate too. As long as you’ve told your employer who should receive the payment, then the insurance company can go ahead and pay it. The money will usually get paid directly to your beneficiaries, not your employer.
If there’s a delay in issuing a death certificate, such as a postmortem, this may postpone the payment.
Is death in service the same as life insurance?
Death in service benefit works very much like life insurance, but there are important differences.
| Life insurance | Death in service | |
|---|---|---|
| What it does | Pays out a lump sum if you die or are diagnosed with a terminal illness while the plan is in place. | Pays out a lump sum if you die while you’re employed. |
| Purpose | To provide financial security to loved ones when you die. |
To provide financial security to loved ones when you die.
|
| Payment amount | You can choose how much cover you need. Many people have life insurance to pay off a debt such as a mortgage. | The amount is determined by your employer. Usually, two to four times your annual salary. |
| Tax status | Will only be paid free from inheritance and income tax if put in a trust. | Usually paid tax-free as policies are put into trust. |
| Premiums | Usually paid monthly. Once bought, the price of the cover stays the same. | You don't need to pay premiums. Your employer covers the cost. |
| Who's insured | Both you and your partner can be insured either together or separately. | Only you can be insured as you're an employee of the company. |
Do I need life insurance if I have death in service?
This depends on your circumstances. A death in service payment is a set amount that doesn’t take into account your financial circumstances.
Ask yourself if it will pay off your mortgage, cover childcare expenses or family bills. If not, then you shouldn’t rely solely on your death in service payment. See it as an additional source of money rather than the only source of money.
A life insurance policy can be tailored to your personal needs. It can also include your partner, so they have cover too. And once set up, you don't lose it if you change jobs. With death in service, you lose the cover when you leave your job. You’ll only be insured again if your new employer offers the insurance.
Learn more: Is it worth having life insurance?
Who gets death in service benefit?
You can choose who receives the death in service payment when you die. You do this by completing a nomination form or letter of wishes. This tells the trustees of the policy who you want to receive the money.
Employees usually nominate their close family to receive the payout. But you could also nominate a friend or charity if the scheme rules let you do that. Payouts can sometimes be split between several people.
The money is actually paid to the trustees who will then decide who receives what. They will usually follow your wishes. If you’ve not told them who should receive the payment, it will go to your next of kin.
Does death in service benefit form part of my estate?
No. Because the death in service policy is held in trust, it sits outside of your estate. As you’re not the policy owner, it won't be counted as part of your wealth.
The amount gets paid to the trustees of the trust who will pass it on to your beneficiaries. This can be done fairly quickly as the money won't need to go through probate either.
Can death in service be contested?
If you’ve completed a nomination form or a letter of wishes, then payment usually goes to the person you’ve chosen.
However, if that person has died, or they can’t be contacted, the trustee will need to decide who should receive the money. It's also possible that someone may come forward with a claim to some of the money. For example, someone who is financially reliant on the deceased employee.
In these circumstances, the trustees’ decision can be contested. However, if they’ve acted in a reasonable way and within the rules of the trust, then their decision is often final.
Vitality life insurance
We provide life insurance for every stage of your life. Here are some of the benefits of taking out life insurance with Vitality:
- A brand you can trust - In 2023, we paid out 99.7% of life insurance claims.*
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- Get free no-obligation advice. Our advisers offer expert advice to help you make the right decisions.
*Vitality Claims and Benefits Report, 2024
