What is death in service benefit?
Last updated 23rd May 2022
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, which is known as a lump sum death in service benefit. Alternatively, your financial dependants could receive the money over a period of time in the form of a pension (referred to as a Dependant's Pension).
In this article, you’ll learn how to check your eligibility for death in service benefit, the different types, what to expect from one of these schemes, and how this form of benefit compares to individually owned life insurance policies.
Am I eligible for death in service benefit?
Before confirming your own eligibility, check to see whether or not your company offers a death in service benefit of any kind. You may already have this information in your company’s policies or documents, but your HR team will be able to tell you for certain.
Many companies offer a death in service benefit through their workplace pension scheme rather than as a separate part of the benefits package. If this is the case, you will also need to check that you are signed up to that scheme.
Finally, check if there are any other eligibility requirements for the particular version of the benefit that your company has set up. Again, if the information is not available to you, your HR team should be able to provide it.
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, although this is a much less popular option now than it has been in the past.
Lump sum death in service benefit
As the name suggests, lump sum death in service provides a lump sum following the death of the scheme member. This is typically a multiple of the member’s salary prior to death (often two to five times their annual salary).
The multiple itself may vary between members. For example, an employee’s pension scheme membership, seniority and age may all affect the multiple of salary covered. It is also important to know how "salary" is defined for the purposes of the scheme as it may not include varying amounts such as bonus or overtime or may be defined at a particular date.
Some schemes will instead choose to provide lump sum death in service benefits at a fixed level such as £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.
Although falling in popularity, some employers may still offer a Dependant’s Pension (formerly known as a Spouse’s, Widow’s or Dependant’s Death in Service Pension). This type of death in service benefit aims to provide those you leave behind with an ongoing pension in the event of your death.
It is important to establish what is covered and note the limitations of a Dependant’s Pension. For example, where children are included as financial dependants, the part of the pension paid to them may stop at a specific point (such as when they turn 21). If you have this benefit, check your employee handbook or pension scheme booklet for the fine print.
How does death in service work?
Both types of death in service benefit should pay out when an eligible employee dies while on their company’s payroll. The death does not have to occur at work, nor does it have to be in any way related. They simply need to be a present employee who qualifies for the employer’s scheme.
What happens if I leave my employer?
It is important to remember that a death in service benefit is only paid out when someone dies who is currently on the company’s payroll. No matter how long you work at a company with this benefit, if you die after you leave, your loved ones will not receive anything from that particular package.
In some cases, there is provision for death in service benefit to continue temporarily if you are made redundant. This ensures that the ex employee remains 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 are written under discretionary trust for reasons of tax efficiency. This means that your loved ones won’t have to pay Inheritance Tax on the lump sum (although any interest your beneficiaries earn on the lump sum would still be subject to Income Tax).
- A Dependant’s Pension 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.
As lump sum death in service benefits are written under a discretionary trust, 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?
In a normal process, the chosen 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 in order and submitting a Nomination of Beneficiary Form will help the process to move as efficiently as possible.
If you have a Dependant’s Pension, the money will be paid to your chosen beneficiary based on the agreed timescale. With this in mind, check your policy or ask your HR department to provide further details about when the payments will be made.
Differences between death in service and individually owned life insurance policies
As a group life insurance policy that’s covered by your employer, you won’t have to pay any premiums for a death in service benefit (unlike with an individually owned policy). Equally, whilst a personal life insurance policy payout would be subject to Inheritance Tax unless written in trust, lump sum death in service payments are not.
That said, because the plan or scheme does not belong to you as a member, you cannot use it for things like life insurance provision to cover mortgage liabilities. In addition, the sum or pension that is paid out will be determined by the company’s scheme, not a personal decision.
Individual life insurance gives you much more control, but comes at a cost before your death in the form of premiums. For a regular fee, you can determine how much money you want to be paid out upon your death, and you are 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
As a death in service scheme is a "group" not an individual policy, insurers generally operate a "non-medical limit":
- If an employee’s potential death in service payment is less than the non-medical limit, then they will not be asked for any medical information or examinations.
- Employees whose prospective benefit amount exceeds the non-medical limit will be subject to medical underwriting by the insurer for the excess benefit.
Death in service plans may also carry what is known as a "Catastrophe Clause" – should a single catastrophic event occur directly causing the deaths of multiple employees, then the total liability under the scheme may be capped.
For example, if the Catastrophic Event Limit is £5 million and twenty employees die with a total benefit amount of £10 million, then the eventual settlement would be halved and the benefits paid would be determined by the Trustees.
Do I need death in service benefit and individual life insurance?
Because of the greater certainty that individual life insurance provides, it is worth looking into even if you are already eligible for a good death in service benefit provided by your workplace.
If you know you are eligible to receive a death in service benefit, you can use that knowledge to plan your personal life insurance accordingly, perhaps combining the totals of the two so that the sum total is the right amount for your loved ones.
A higher overall total is often worthwhile, especially in cases where the death in service benefit lump sum is not enough to cover a specific cost, like an outstanding debt. If this is true for you, individual life insurance will help to top up the total amount and ensure that your beneficiaries are properly provided for after your death.
No matter how carefully you plan, be aware that your situation may change. If you leave the job which provided your death in service benefit, and do not then replace it with an equally valuable scheme at a new company, you should reevaluate your personal life insurance policy to make sure that it will still pay out enough for your beneficiaries.
Planning for your loved ones’ financial security after your death helps to give you all some 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.