Death in service vs life insurance

Death in service is a benefit typically provided by employers as part of a company’s occupational benefits. It’s paid  as a lump sum if an employee dies while still on the company payroll. Death in service is linked to your employment and is not a standalone personal policy, meaning if you change jobs, the  cover with that employer ends.

The level of payout from a death in service policy is dependent on several conditions. It’s usually a multiple of your salary (often two to four times), is subject to employer discretion, and it’s not compulsory for employers to offer it. As not  all employers offer this benefit, it’s worth checking when you’re looking into your own protection needs.

What does death in service mean?

Death in service is when someone dies while still employed by their company. It’s usually a tax-free lump sum to a nominated person in the event of your death. Your employer will ask you to name the person you want to receive the payment (your instructions aren't binding but they're normally taken into account).

Unlike death in service, life insurance is a personal policy, chosen  and paid for by individuals – not their employer. It’s designed to help protect your partner and family  from shouldering large costs like living expenses, mortgage repayments and ongoing household bills, if you pass. 

Couples with a mortgage may want to protect their house if their partner passes while they’re still paying it back. Or families may want to ensure there’s cover in place to support their children’s education if something were to happen to them.

There are different types of life insurance, including level life insurance, decreasing life insurance and over 50s. 

While both death in service and life insurance may help provide a financial helping hand for your loved ones, they have clear differences.

• Coverage – death in service is employer-provided, whereas life insurance is a personal policy. 
• Payout calculation – with death in service, the payout is a multiple of your salary. With life insurance you choose the level  of cover you need.
• Employment dependency – death in service is linked to your job, but life insurance is an independent policy. 
• Tax implications – both death in service and life insurance are usually tax-free, but they may differ in estate planning.
• Portability – the death in service benefit ends if you leave your job, whereas with life insurance you can select the number of years that you need protection.

Death in service 

Advantages of death in service insurance:

• It’s usually provided by the employer with no extra cost to the individual.
• A death in service payout isn’t usually taxable.
• It can be possible to qualify for death in service payment even if your health condition makes it more difficult to secure life insurance.
• Your family may receive a large cash sum when you die – for example, if you earn £25,000, and your death in service benefit is four times your salary, your family may receive £100,000.

Disadvantages of death in service insurance:

• Your benefit may end if you leave your current job  (however, you might get cover from a new employer).  
• If you previously chose death in service over life insurance, it may be more expensive to take out a life insurance policy when you’re older or if your health has deteriorated.
• Your cover is based on a multiple of your salary – so it may or may not cover your needs.
• The request to pay your beneficiaries is a request, rather than binding obligation . While  very rare, it could mean your next of kin receives the payment rather than your selected beneficiary.

Life insurance

Advantages of life insurance:

• Provides security for your loved ones providing a payout if you pass away during the policy term – it could help them to stay in the family home.
• It can help your family to maintain their lifestyle, even if you have limited savings.
• Payout can be put towards things such as the mortgage or rent, household bills, or childcare costs.
• It can ease the financial burden of your passing for your loved ones.
• It is often a lending condition of mortgages.

Disadvantages of life insurance

• Life insurance comes with an on-going monthly cost to consider.
• There can be higher premiums for older policyholders.
• It only lasts for a fixed amount of time.
• The insurer will ask about your health and lifestyle to see if they can insure you.

It depends on your personal circumstances. Some  people may decide to opt for both a death in service policy and life insurance cover. If your employer does offer a death in service benefit, you need to consider whether a multiple of your salary would be enough to support your family after you die. 

For example, if you have an outstanding mortgage of £200,000, a death in service payout of £100,000 wouldn’t be enough to pay this off. You also may not stay in your job forever, so you may lose the benefit.

With life insurance, you can rest assured that the cash sum and policy length are defined, and you can understand what your loved ones can expect.

Death in service and life insurance are not linked, but they can work in unison to ensure that your loved ones will be taken care of after your passing.

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