Death in service benefit vs life insurance - How do they compare?

The death of a loved one is always difficult to deal with. It can be even more challenging when the loss occurs unexpectedly, and your family is left to pick up the pieces. The good news is that there are many options available to help ease your family's financial burden.

One option is to purchase a life insurance policy. However, your employer may provide some degree of “death-in-service” life insurance as part of your benefits package. But what's the difference?

What is life insurance?

Life insurance is a contract between you and your insurance provider which protects you in the event of death. The purpose of life insurance is to provide financial protection for your family if you die prematurely.

It can help them with financial commitments they may struggle to pay alone, such as outstanding debts, mortgage repayments and living costs.

Types of life insurance cover

The most common types of life cover are whole and term. While they sound similar, both policies have significant differences...

Whole Life Insurance is a type of permanent cover, protecting you for the rest of your life. The policy pays out a fixed cash lump sum when you die, helping your family cover various costs. As cover is permanent, you won't have to worry about the policy expiring.

Term Life Insurance provides temporary coverage for a set period of time (for example  10 years, 20 years. 30 years etc.). It can be cheaper than a whole life policy, but doesn't offer as much security. The policy will only pay out if you die within the specified period. If you survive longer than the term, the policy expires and you won't receive any compensation.

The policy will only pay out if you die within the specified period. If you survive longer than the term, the policy expires and you won't receive any compensation.

Joint life insurance is an ideal choice for couples who share an income or mortgage. The policy protects two people under a single policy. Joint policies typically pay out after the first death in the couple. The surviving member then has money to help to cover various finances, and the policy ceases to exist.

Alternatively, it is also possible to purchase joint life insurance that pays on upon the second death. This is a great option for leaving an inheritance or to cover a potential inheritance tax liability.

Joint life insurance policies tend to be cheaper than 2 single life polices, but it’s important to remember that if both parties pass away during the term of a joint plan, there is only one payout. If both parties were to pass away with a single policy each, there would be 2 payouts.

What is death in service benefit?

Death-in-service cover is usually an amount of personal life insurance equal to a multiple of your annual salary which will be paid to your estate — tax free — if you become seriously ill, injured or die whilst employed.

This type of benefit is designed to help families cope with the loss of a loved one.  In most cases, this benefit is paid out to the employee’s family members. However, there are certain circumstances where the money goes directly into the deceased worker’s bank account.

Death in service payments varies depending on the job role and length of employment. If an employee dies while under employment, the company usually pays a tax free lump sum to a chosen beneficiary.

This benefit is often offered as part of the employee benefit package a company offers to its employees or workplace pension scheme. In many instances, the company will also cover funeral expenses and private medical care.

For example, if you earn £30,000 a year and your death-in-service benefit is three times your salary, you have £90,000 of life insurance cover.

In the example above, £90,000 might seem like a tidy sum. However, you should ask yourself whether that is enough to secure your loved ones’ financial future if you should die.

Will I still need life insurance if I have death in service cover?

Death in service policies are typically offered by employers, and most people don't realise they're eligible. You can find out whether your employer offers this benefit by asking them. If they do offer it, you'll need to make sure you understand the terms and conditions of the policy.

Even if you are offered a death in service benefit by your employer, you may want to consider taking out life insurance. However, there are differences between life insurance and death in service benefits.

Unless you have a personal life insurance policy set up, this could leave you in a vulnerable position where you aren’t covered at all between jobs and maybe not covered in your next role.

Personal life insurance policies also tend to be more expensive as you get older. Age plays a factor in the pricing of your policy, as well as your medical history. Generally speaking, getting life insurance when you’re young and healthy is best for keeping the costs low.

How much cover will I need?

The amount of cover you need will be different for every person. You should consider your individual circumstances. For instance, you might have a mortgage and or other outstanding debts that will need to continue to be paid down.

You should also ask yourself how much money your partner may need to maintain their standard of living, including bringing up any children. Also consider if it would be more beneficial to provide your family with a lump sum they can manage, a fixed annual income, or perhaps both.

What if I leave the company?

If you leave your current company, you should be aware that your death-in-service benefit will not follow you to your new position. If you’re in good health that may not be a major concern, and you can arrange your own cover at that point.

However, if you develop a serious medical condition that causes you to leave work or change your job, you may find it difficult to find your own life cover by then or it may be prohibitively expensive. (There are other life insurance products such as critical illness or income protection cover that may pay out a lump sum or an income if you become seriously ill.)

Death-in-service benefit can be a valuable addition to your employee benefits, however you should look at your own situation and ask yourself whether it will sufficiently provide for your family.

The next steps…

If you're looking to purchase a life insurance policy, why not speak to one of our expert advisers. They can help navigate you through the application process and which type of cover is best suited for you. However, if you know what you need, simply apply for an online quote through our website.