Death in Service: How Does it Work?
Working for an employer offering death in service means your loved ones should receive a payout if you were to die while in its employment. It can offer valuable protection similar to life insurance, although how death in service benefit works means it might still be worth considering life cover.
A death in service payment can provide valuable financial support to those you leave behind if you die while employed by a company that offers its workers death in service benefit. Find out more about how death in service works and how it is different from life insurance.
What is death in service?
Death in service is a benefit that an employer might provide, which will pay a lump sum to your loved ones if you pass away while you’re working for that company. Death in service payments are usually calculated as a multiple of your salary – typically between two and four times your annual earnings – and paid as a tax-free cash amount to your chosen beneficiary.
You won’t normally need to pay anything to qualify for death in service benefit, but there is no legal obligation on an employer to offer it either.
What does death in service mean?
The term ‘death in service’ can sometimes cause a little confusion. What it’s referring to is that you need to be employed by the company offering the benefit when you die for the lump sum to be paid out.
Importantly, what it doesn’t mean is that you have to die while you’re at work or doing anything connected to your job for a payout to be made – you only need to be on the payroll.
Is death in service the same as life insurance?
Death in service and life insurance both have the potential to pay out a lump sum to your beneficiaries if you die. However, that is where the similarities tend to end.
Death in service vs life insurance
Some of the main differences between death in service and life insurance are:
Am I covered by death in service?
You will only have death in service cover if it’s a benefit that your employer provides and you’re on the company payroll. This means you won’t qualify if you work for a company but are self-employed. Sometimes you’ll also need to be a member of the company pension scheme to be eligible for death in service.
If you leave that employer, you’ll no longer be eligible for death in service benefit through that company, and there will be no payout if you die.
Do all employers offer a death in service benefit?
There is no legal requirement that a company must offer death in service benefit, and there are many employers that don’t. Any cover that is provided will be part of a company’s benefits package that it makes available to employees.
If you’re not sure whether you have death in service benefit, or want to know more about any cover you think you have, it’s best to talk to your employer.
How much will a death in service payment be?
This will depend on the death in service scheme that an employer decides to put in place. Death in service benefit will usually pay out between two and four times your annual salary, although there may be companies where the multiple used is higher. You’ll need to check with your employer to find out how much they pay.
As an example, if you’re earning £60,000 a year when you die, and your company provides a death in service benefit that pays out four times your salary, a cash lump sum payout of £240,000 can be expected.
Who gets death in service benefit?
If you join a company that provides death in service benefit, you should be asked to complete a Nomination of Benefit or Expression of Wish form on which you can nominate a beneficiary (or beneficiaries) who would receive the payout in the event of your death while you were an employee.
It’s worth noting that death in service schemes tend to be set up as discretionary trusts. This means your employer – as trustee of the scheme – makes the final decision over who receives the money. Despite this, the wish you expressed in the relevant form will almost always be respected and your nominated beneficiary, or beneficiaries, should get the money. If there is more than one beneficiary, you will also be asked to write the proportion of the payout each beneficiary will get and make sure that it adds up to 100%.
It is worth checking that you have filled out the Expression of Wish form and that the details are up to date, as otherwise the payout may go to another relative or dependant if there has been a change in circumstances – for example, if the nominated beneficiary has died.
» MORE: What is a trust?
How long does death in service take to pay out?
If there are no problems with the paperwork, it’s possible a death in service payout could be made in around two weeks. Making sure you’ve nominated a beneficiary can usually help avoid unnecessary delays, as it will be clear who would receive the payout.
A payout may take longer if your nomination form can’t be located, and it needs to be decided who should receive the payout. Generally this would be your next of kin, but they may have to wait for the payout while a final decision is made. Payments can also be delayed if an inquiry or investigation is required perhaps because the death was suspicious or unexpected.
Does death in service benefit form part of your estate?
A death in service payment won’t usually be part of your estate. Because of how death in service benefits are set up, a payout normally goes into a discretionary trust from where the trustees will distribute the money directly to your beneficiaries, therefore avoiding being considered part of your estate.
» MORE: Estate planning explained
Is death in service taxable?
As death in service benefits are usually set up as discretionary trusts, a lump sum payout won’t normally be subject to inheritance tax because it doesn’t form part of your estate. However, if your beneficiaries start to earn interest on the lump sum, this would be subject to income tax.
In addition, having death in service cover as an employee isn’t generally considered a benefit-in-kind. This means the benefit doesn’t need to be counted towards your taxable income in the same way that some other perks of your job might.
Do I need life insurance if I have death in service cover?
Although both could provide a lump sum to your loved ones if you die, if you have death in service benefit it’s often best to consider how this can offer financial protection for those you care about alongside life insurance, rather than instead of it.
As you don’t get to choose your death in service payout, it’s important to work out if it would be enough to offer the level of financial support you want for those you leave behind. Keep in mind that an employer can decide to reduce or remove their death in service cover if they wish to do so.
And because death in service benefit ends when you leave a company, you could be left with no cover at all if you retire or your new job doesn’t come with death in service and you don’t have life insurance to fall back on. Even if it’s a benefit that is offered with a new job, it might provide less cover than you need if your salary or the multiple used to calculate the payout is lower than before.
Consider as well that if you solely rely on death in service for cover but then need to arrange life insurance if this benefit is removed, life cover tends to cost more the older you are when you apply. There may also be a greater chance that you’ll have encountered health issues as you get older, which could make premiums more expensive.
So while death in service is undoubtedly a valuable benefit to have, if your circumstances require more cover or extra security exploring how life insurance can help achieve this will usually prove sensible.
» COMPARE: Life insurance quotes
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Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more