Death in service benefit and life insurance are both ways to provide your family with essential financial support if you were to pass away unexpectedly during your working life.
But what’s the difference between the two types of cover? And do you need both?
To find out, continue reading as we compare death in service benefit and traditional life insurance…
What is death in service benefit?
Death in service benefit, also known as group life insurance, may be provided by the company you work for as part of your employees benefit package.
It pays out a multiple of your annual salary (usually two, three or four times the amount) if you were to pass away whilst employed by them, no matter the cause of death. You do not need to have passed away whilst undertaking your job for your loved ones to receive a pay-out, just during your term of employment.
This is a valuable benefit, particularly if you’re the main earner for your household and have dependents who rely on your income.
Many employers use a generous death in service benefit package as a means of attracting the most highly rated candidates.
What is life insurance?
Life insurance is a product that you can buy as an individual and it provides your family with a cash payout in the event of your death.
The pay-out amount and how long you’re covered for is agreed between you and the insurer, so it can be suited to your unique needs.
You pay a monthly premium whilst the policy is active and the cost depends on the policy terms and personal factors such as your age, health and lifestyle.
With ordinary life insurance, you’ll need to go through an application process that will determine if you’re eligible for cover or not.
During the application process, you’ll be asked questions about your health and lifestyle, to help the insurer assess the level of risk you’ll pose to them. Post-pandemic you are likely to be asked specific COVID-related questions too, such as have you ever tested positive.
Most people can secure life insurance but the younger and healthier you are, the cheaper your premiums will be and the risk to the insurer is lower.
In terms of death in service, you just need to be employed by a company that offers this additional benefit and your death is covered.
Death in service is more often than not a free perk offered by most employers.
Whereas personal life insurance will cost a monthly premium and you’ll need to factor this into your budget.
Still, life insurance can cost from just a few pounds a month, especially if you take it out sooner rather than later.
One key difference between death in service benefit and life insurance is how much your family could receive after you’re gone.
The maximum pay-out for death in service is usually limited to between two and four times your annual salary.
Whilst this seems like a lot, it may not be enough to cover all the key financial commitments you’ll leave behind such as mortgage repayments, household bills, debts and childcare.
Some insurance advisors have said that the ideal pay-out is actually more like eight to times your salary.
A personal life insurance policy could offer this higher level of cover to ensure your family are fully protected should the worst happen.
Ordinary life insurance can be taken out at any time, whether you’re working or not, and there are different policy types to suit different needs.
You can also choose what you want to protect, how long your policy lasts and who the beneficiaries are.
Many people have life insurance to ensure that their mortgage can be paid off and their family can live comfortably in the home until long after they’re gone.
On the other hand, death in service benefit is much less flexible.
Firstly, you can’t decide how much you’re covered for and the payout may not be enough to cover everything your family needs.
Secondly, premium payments are paid into a discretionary trust which means the trustees have the final say as to who’ll benefit from the policy.
And thirdly, if you were to leave your job for any reason, such as to change jobs (to an employer who doesn’t offer death in service) or retire, then your benefit will expire, leaving you without any life cover.
As a result, you may need to take out a personal life insurance policy at a later date when premiums will be higher due to your age.
5. Inheritance tax
One of the best things about the death in service benefit is that it’s automatically exempt from inheritance tax (IHT).
It won’t be considered as part of your estate when you pass away and your family will receive the full payout.
Personal life insurance is different because it will be considered as part of your estate – unless you choose to write your policy in trust.
Fortunately, this can be done easily and without extra cost when taking out your cover with an insurer.
6. Extra cover
One advantage of ordinary life insurance is that you get extra coverage and additional benefits with your policy which could save you money in the long term.
For example, most term-based life insurance policies come with free terminal illness cover. This means that if you were to be diagnosed with a terminal illness and had 12 months left to live, then you can make an early claim on your policy.
Some insurers also allow you to make changes to your policy if your circumstances change, without having to provide them with new medical information.
For example, if you move home or extend your family then you could choose to increase your cover and/or change the term length.
Death in service benefit can’t be added to or changed at any point unless you happen to move to a new employer that offers a higher payout rate.
Do you need both employee life insurance and personal life insurance?
This really depends on your individual circumstances. If you have the bonus of free life cover through your employer, then you may feel that’s sufficient for your needs.
Although, as mentioned before, when you leave your employer you’ll also leave behind the cover.
A personal life insurance policy can give you peace of mind that no matter what happens, your family will be taken care of.
The other option is to take out a personal life insurance policy to supplement your death in service benefit payout.
For example, if you need £300,000 of cover but will only receive a payout of £150,000 from your employer, then you could just top this up with £150,000 of life insurance.
You could find out your options for all types of personal life insurance by using an FCA regulated broker, such as Reassured.
They have a team of experts who’ll compare quotes from some of the best life insurance providers in the UK.
The life insurance industry is one sector that has thrived since the COVID-19 pandemic, as more and more people look to protect their loved one’s financial future. Have you ever considered a career in insurance?