Is death in service the same as life insurance?

Is death in service the same as life insurance?
Is death in service the same as life insurance?

As both types of cover provide a financial lifeline for your loved ones, you may be wondering if death in service is the same as life insurance. They are very similar in that a lump sum is paid to your loved ones when you pass away. However, there are key differences between them, which we’ll explain below.

What does death in service mean?

Death in service is often offered by employers as a benefit, meaning you don’t have to pay for this cover. If you die while still on your employer’s payroll, a tax-free lump sum will be paid out to your nominated beneficiary.

How does your death in service benefit work?

The amount paid out in the event of your death is determined by your employer. It is usually between two and four times your annual salary. A death in service payout is lower than a payout for life insurance but you don’t have to pay any premiums for the cover. As well as that, your death in service policy isn’t underwritten. This means that you don’t need to answer questions about your health and lifestyle before the insurer decides if they’re prepared to cover you. The payout can be made into a discretionary trust rather than straight to a beneficiary. In this way, no inheritance tax would be payable on it.

You should be aware that your death in service benefit stops when you no longer work for your employer. This applies whether you start working for a new employer, are made redundant or retire. If you change jobs, check that your new employer offers this benefit. You also need to bear in mind that you may become seriously ill and this illness may eventually lead to your death. If you’re unable to work due to the illness, it’s likely that you will lose your job. At that point, your death in service cover will immediately end. This means your loved ones won’t receive anything when you pass away.

Another downside to this cover is that you can’t stipulate what it is used for. For example, you can’t insist that it’s used to pay off some of your mortgage so that your loved ones feel secure in the family home.

The pros and cons of death in service

Here’s a summary of the advantages and disadvantages of death in service.

Advantages

  • This benefit is provided by your employer so you don’t pay any premiums.
  • Your death in service policy isn’t underwritten.
  • A payout is made to your loved ones as long as you’re still on the payroll when you die.
  • The lump sum payout is tax-free.

Disadvantages

  • The payout amount is based on your salary and may not offer sufficient financial protection for your loved ones.
  • You may need to belong to the company’s pension scheme to be entitled to this benefit.
  • If you stop working for your employer, the cover ends immediately. Your new employer may provide this benefit but with a different salary multiplier or they may not offer this benefit at all.
  • Although you’ve nominated a beneficiary, the trustees make the final decision regarding the payout if it’s made into a discretionary trust.
  • You can’t receive this benefit if you’re self-employed.

What is life insurance?

When you have a life insurance policy, a lump sum is paid out to your loved ones if you die within the policy term. The sum can be used to pay off a particular debt, such as your mortgage, to cover your funeral costs and to provide extra financial help so your loved ones can pay the bills and other living expenses.

How does life insurance work?

You can take out a life insurance policy whenever you want and regardless of whether you’re employed, self-employed, unemployed or retired. Unlike death in service, you decide on the amount that’s to be paid to your loved ones when you pass away. You specify who the sum is to be paid to and what it is to be used for unless you’re happy to leave them a legacy to use as they wish. You also choose how long you want the cover to last for. For example, there may be 20 years left on the mortgage loan for your home in Bexley. Your life insurance cover can match the amount of your mortgage loan and last for 20 years to ensure your mortgage is repaid if you die within that time.

There are different types of life insurance cover to choose from. These are level term, decreasing term, increasing term and family income benefit. Each of these affects the cover amount and your premiums. Our mortgage and protection advisers can discuss these with you to help you decide which one is best suited to your needs.

Life insurance premiums

The insurer takes your health, lifestyle and family’s medical history into account when you apply for life insurance. These factors – along with your age, the cover amount and preferred type of cover – determine how much your premiums will be.

The older you are when taking out life insurance, the higher your premiums will be. This is because there’s an increased risk of you succumbing to health issues. Therefore, if you have death in service and are considering using life insurance to provide your loved ones with extra financial protection, it’s best to take out a policy as early as possible to benefit from lower premiums.

With this type of insurance, you can also opt to take out a joint life policy with your partner instead of you both taking out single life policies. This is usually a cheaper option than arranging two separate policies.

The pros and cons of life insurance

Here are the advantages and disadvantages of life insurance at a glance.

Advantages

  • You choose your preferred type and level of cover.
  • You specify the beneficiaries.
  • You can decide what the payout is to be used for if you prefer.
  • Your life insurance policy can be written in trust. This allows your beneficiaries to use the funds to cover an inheritance tax bill that may be due.
  • The cover continues until the end of the policy term or when you pass away.
  • You can opt for joint life insurance to cover both you and your partner.

Disadvantages

  • Arranging a life insurance policy becomes more expensive the older you are.
  • Life insurance is underwritten.
  • You pay monthly premiums.
  • You need to ensure the premiums are kept up to date to ensure your cover remains in place.

Do you need life insurance if you have death in service cover?

Not all employers offer death in service so it’s a good idea to check whether you receive this benefit. As the amount that’s paid out is lower than a life insurance payout, think about whether it’s enough to cover your loved ones’ financial needs. Would they be able to afford the mortgage repayments? Would they be able to cover the monthly bills and other living expenses? Or would they benefit from additional financial help? If so, it makes sense to take out a life insurance policy as well to top up how much they receive.

Even if you’re happy with the payout amount, consider having separate life insurance in case your situation changes. Whilst you have to pay for this cover, you can have peace of mind that a substantial payout will be made to your loved ones when you’re no longer around to financially support them.

If you’re self-employed, you can’t benefit from death in service. Therefore, it’s worth arranging life insurance to protect your loved ones should the worst happen.

Arrange affordable life insurance

Our expert protection brokers can guide you on the differences between death in service vs life insurance. Providing you with impartial advice, you can compare the life insurance options available to make an informed decision about your financial protection. Simply give us a call on 01322 907 000 to benefit from the best life insurance cover that’s tailored to your needs. Alternatively, send an email to us at info@trinityfinance.co.uk. We’ll reply to you with more information about the life cover products we can help you with.

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