Life insurance is important for many people. It pays out a lump sum if you die or suffer a critical illness, helping your dependents cope financially.
Death in service is similar.
Yet some people may be unsure if they have death in service, while others may not know if it would be enough for their family to live on. Meanwhile, those who have death in service may not realise they could benefit from taking out life insurance too.
Let us explain how it works…
Death in service in a nutshell
Death in service may be offered by companies as part of an employee’s benefits package. It’s paid out as a tax free lump sum if you’re employed by the company (i.e. on the payroll) at the time of your death.
While death in service may sound similar to life insurance, there are in fact a number of differences. This means that even if you have death in service, you might want to boost your cover with life insurance. Here’s why…
Death in service
The tax-free payout of a death in service benefit can vary, but it’s typically two to four times your annual salary*. Sometimes, death in service is linked to a company’s pension scheme, and you’ll need to be signed up to it to qualify for the benefit. Finding out what you’re entitled to receive is simple – just ask your employer.
You might think the benefit is a substantial sum of money, but you want to be sure the financial safety net for your family is as wide as it can be. Plus, if you were to die, the costs involved soon add up – especially considering the average cost of a funeral is just below £4,300**.
Though a death in service payout is free of tax, bear in mind that tax is based on your personal circumstances and may change in the future.
The payout of a life insurance policy depends on the cover you’ve chosen to take out – meaning you have the freedom to decide how much your beneficiaries get, not your employer. Bear in mind that any payout could form part of what it called your ‘estate’ – your overall net worth – so may incur inheritance tax.
Depending on how much your beneficiaries may need if you were no longer around, you may wish to supplement your death in service benefit with a life insurance policy.
One of the main draws of death in service is that there’s no annual or monthly premium to pay – you just need to be employed to benefit from it. You’re required to make regular payments for life insurance, but, of course, your family or named beneficiaries could receive a higher payout in the event of your death.
You can take your death in service benefit into account when you apply for life insurance, which can bring down the cost of cover because you will need less of it.
It’s also worth remembering that if you leave the company where death in service is offered, you’ll no longer be covered.
Who receives the payout?
Death in service
Usually, death in service schemes are set up under a discretionary trust, meaning trustees – i.e. your company – will have the final say as to who receives the money, though you are given the opportunity to nominate a beneficiary. This shouldn’t be a problem, but it’s important to check with your employer if this is the case, and make your requirements clear.
It’s worth bearing in mind that you’re unable to assign your death in service benefit to cover your mortgage, but your beneficiaries can decide to use the money towards repaying a mortgage.
With life insurance you have more options on who receives the payout. For example, you could place it in trust and choose your own beneficiaries, you could assign it to your mortgage, or you could simply leave it to form part of your estate.
Another key difference between life insurance and death in service is that you will not be underwritten for death in service.
Underwriting is the process by which an insurance company will decide whether or not to offer you a policy, usually by asking you questions about your health and activity.
You will go through underwriting when taking out a life insurance policy.
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This article was first published in September 2018