What is death in service benefit?
Last updated 31st May 2023
7 min read
Death in service benefits may be provided by employers as part of their employee benefits package or pension scheme. If you’re eligible and die while on your company’s payroll, this type of benefit can provide your loved ones with some money.
The payout often takes the form of a lump sum equal to two to five times your annual salary. This is called a 'lump sum death in service benefit'. Alternatively, your financial dependants could receive the money in the form of a pension. This is called a 'Dependant's Pension'.
In this article, we explain how to check your eligibility for death in service benefit. We also explore the different types and what to expect from one of these schemes. Plus, we look at how this form of benefit compares to personal life insurance policies.
Am I eligible for death in service benefit?
The first step to checking your eligibility for death in service benefit is to see if your company offers it. You may already have this information in your company’s policies or documents. If you're unsure, your HR team will be able to tell you.
Some companies offer death in service benefit as a separate benefit. But many offer it through their workplace pension scheme. If this is the case, you'll also need to check that you're signed up to that scheme.
Finally, check if there are any other eligibility requirements that your company has set up. Again, if the information is not available to you, your HR team should be able to help.
Different types of death in service benefits
Death in service schemes may provide two different forms of benefit. The most common is a lump sum death in service benefit. The alternative is a Dependant's Pension, but this is a less common option nowadays.
Lump sum death in service benefit
If you have a lump sum death in service benefit, your chosen beneficiaries or next of kin will get a one-off cash payout when you die. The amount is usually calculated based on your earnings before you die. Often, this is two to five times your annual salary.
The amount itself may vary from person to person. For example, your pension scheme membership, seniority and age may all have an impact. It’s also important to know how your scheme defines ‘salary’. It may refer to what your salary was on a particular date. And it may not include extra earnings such as bonus or overtime payments.
Some schemes will instead provide lump sum death in service benefits at a fixed amount. For example, £100,000 per employee.
If you’re eligible for a lump sum death in service benefit, check your employee handbook or benefits scheme information to find out how the payout will be calculated.
Some employers may offer a Dependant’s Pension. (This used to be known as a Spouse’s, Widow’s or Dependant’s Death in Service Pension.) But these are becoming less common.
If you die, this type of death in service benefit gives your loved ones regular payments in the form of an ongoing pension.
It’s important to check what is and isn’t covered with your Dependant’s Pension. If children are included as financial dependants, the part of the pension paid to them may stop at a specific point. For example, when they turn 21 or leave full time education.
If you have this benefit, check the fine print of your employee handbook or pension scheme.
How does death in service benefit work?
Death in service benefits should pay out if an eligible employee dies while on their company’s payroll. The death does not have to happen at work, or be in any way related to it. They simply need to be a current employee who qualifies for the employer’s scheme.
What happens if I leave my employer?
A death in service benefit is only paid out when someone dies who is currently on the company’s payroll. So, if you die after you leave, your loved ones will not receive anything from that particular package. This applies no matter how long you worked for the company.
In some cases, your employer may continue a death in service benefit temporarily. (For example, if you are made redundant.) This makes sure you remain covered by the plan until joining a new employer's benefit package. The old cover is generally provided for a set period of time after the redundancy. Check with your employer to see if this applies to you.
Will my loved ones have to pay tax on death in service money?
This depends on the type of death in service benefit you are eligible for:
- Lump sum death in service benefit schemes
These are written under discretionary trust for reasons of tax efficiency. This means that your loved ones won’t have to pay Inheritance Tax(www.gov.uk opens in a new tab) on the lump sum. (But any interest they earn on the lump sum would still be subject to Income Tax(www.gov.uk opens in a new tab).)
- Dependant’s Pension
This death in service benefit counts as a form of income and will be subject to Income Tax.
Who receives death in service benefit money?
You can choose the beneficiaries of the death in service benefit money. This is managed by submitting a Nomination of Beneficiary Form.
Lump sum death in service benefits are written under a discretionary trust. This means the Trustees ultimately decide who receives the money and if they receive it. Don’t let this worry you – in almost all cases, the benefits will be paid to your chosen beneficiaries.
How long does it take to pay out death in service money?
The beneficiaries of the deceased should receive the lump sum death in service benefit around two weeks to a month after their loved one’s death. Having all the paperwork done and submitting a Nomination of Beneficiary Form will help the process to move as quickly as possible.
If you have a Dependant’s Pension, the money will be paid to your chosen beneficiary based on the agreed timescale. Check your policy or ask your HR department to give details on when the payments will be made.
Differences between death in service and individually owned life insurance policies
Death in service benefit is a type of group life insurance policy that’s covered by your employer. This means you won’t have to pay any premiums yourself (unlike with an individually-owned policy).
Lump sum death in service payments are not subject to inheritance tax. (Unlike a personal life insurance policy payout, which would be subject to Inheritance Tax unless written in trust.)
That said, because the plan or scheme does not belong to you, you can't use it for things like life insurance provision to cover mortgage liabilities. Also, the sum or pension that's paid out will be set by the company’s scheme, not a personal decision.
Individual life insurance gives you more control. But it comes at a cost before your death in the form of premiums. For a regular fee, you can choose how much money you want to be paid out on your death. Plus, you're free to choose the type of life insurance you buy.
If you want to look into your options further, you may find our over 50s life insurance page helpful.
Limitations on death in service benefits
A death in service scheme is a 'group' not an individual policy. So insurers generally specify a 'non-medical limit' for the payout. This means that:
- If your death in service payment is less than the set non-medical limit, you’ll be covered with no need for medical information or examinations.
- If your payout would be more than the non-medical limit, you may need to give some medical information. This is so they can cover you for any amount over the non-medical limit. This is called medical underwriting.
Death in service plans may also have something called a 'Catastrophe Clause'. This means that if a single catastrophic event causes the deaths of multiple employees, the total liability under the scheme may be capped.
For example, if the Catastrophic Event Limit is £5 million, but twenty employees die with a total benefit amount of £10 million, the settlement would be halved. The Trustees would decide on how the benefits are paid.
Do I need death in service benefit and individual life insurance?
Individual life insurance can provide greater certainty than death in service benefit. So it could be worth looking into, even if you’re eligible for a death in service benefit from your workplace.
If you’re eligible for a death in service benefit, you can use this to plan your personal life insurance needs. For example, you could combine two payouts, so the sum total is the right amount for your loved ones. (Consider speaking to a financial adviser about important financial decisions.)
For example, maybe your death in service benefit lump sum isn’t enough to cover a specific cost. In this case, individual life insurance could help to top up the total amount. This could help to ensure your beneficiaries are provided for after your death.
No matter how carefully you plan, your situation may change in future. If you leave a job that provides a death in service benefit, you might not have a similar scheme at a new company. You may then want to take another look at your personal life insurance policy to make sure it will still pay out enough for your loved ones.
Planning for your loved ones’ financial security after your death can give peace of mind. If you want to read more around your options in this area, you could try the following pages:
Or read more of our guides to help you manage your money after 50.