No one wants to give or receive money from group life cover, because it means the death of an employee and someone who supported their family financially. Death-in-service is an employee benefit which pays out a tax-free lump sum if you are employed by the company at the time of your death. The pay-out is usually between two and four times your annual salary.
How does a life insurance policy work after someone dies?
Typically life insurance benefits are paid when the insured has died, and the beneficiary(ies) file a death claim with the insurance company, submitting a certified copy of the death certificate.
Is death in service the same as life insurance?
As part of an employer’s benefits package you might get death in service, which is like life insurance but has many key differences. In summary, if you die while working for your employer your death in service benefit will pay out a lump sum.
Do you need life insurance as well as death-in-service?
People assume they don’t need life insurance if they have death-in-service benefit because both pay out a lump sum on death. However if you want to link your life policy to your mortgage, or you want to specify the beneficiaries, it could be worth taking out separate life insurance.
The death-in-service pay out usually only pays out up to 4 x your annual salary and therefore could leave your family struggling to cope. If you have a family and dependents it is normally advised to have life cover of about 10 times your income. Which is a lot more than the average death-in-service pay out.
In other words, you might need to top up the death-in-service benefit with separate life insurance.
For example, if you earn £30,000 a year and have death-in-service benefit of four times your salary, you could expect a pay out on death of £120,000.
Therefore, you may want to arrange additional life cover of £180,000 to give a total pay out of £300,000, or ten times your earnings.
Topping up your life cover in this way should result in cheaper premiums because you are only buying £180,000 of cover instead of £300,000.
Advantages and Disadvantages of death-in-service benefits:
- Death-in-service is usually free as part of a benefits package.
- The lump sum pay-out is tax free.
- You could be entitled to four times your annual salary – or even more.
- You can take your death-in-service benefit into account when buying life insurance, so hopefully reducing the premiums due to the lower sum assured needed.
- You might not have total control over who gets the tax-free pay out
- If you are not a member of the company pension scheme, you might not qualify
- You do not qualify for death-in-service if you are no longer an employee
- The death-in-service pay out might not be enough to cover your life insurance needs
If you have any questions or queries on this topic, please feel free to leave a comment or contact us here.