In this article we explain how death-in-service benefit works and what you should check and understand about it as an employee and also as an employer.
How does death-in-service work?
Death-in-service benefit is an employee life insurance policy that is arranged on a group basis to provide life insurance to employees collectively. An employer who wishes to offer death-in-service benefits will arrange a group life insurance scheme and it is usually linked to the company pension scheme. The employer can add and remove employees from group life insurance schemes as well as determine the amount of insurance provided.
Details of your death-in-service benefit are usually found within the benefits package offered under your employment contract. Some employers include eligibility criteria for this benefit. The criteria might include passing an initial probation period, completing a particular length of service and/or meeting specific objectives.
How much does death-in-service pay?
Death-in-service pays out a multiple of your annual salary if you die as a tax-free cash lump sum. The multiple usually ranges between 1 and 4 times your annual salary but some generous packages can offer up to 10 times your annual salary or more. If your remuneration package is made up of a basic salary plus bonuses and other flexible parts, it is useful to understand what amount will be used for the calculation.
Some employers offer varying levels of benefits to staff based on performance and seniority. In the public sector, benefits usually increase with employment grades and levels achieved within your occupation. So, you may not receive the same amount of death-in-service benefit as your work colleagues and often people negotiate benefit levels as well as salaries when being promoted or changing job roles.
What does employee life insurance cover?
Employee life insurance provides you with a death-in-service benefit that will pay out a tax-free cash lump sum in the event of your death. It is important to note that the death does not have to happen at work or due to a work incident - you merely have to be employed by the company at the time of your death. Every life insurance contract has its own terms and conditions and you should read these to understand what is and is not covered. For example, some life insurance policies exclude suicide or death caused by self-harm in the first year.
Some employers offer enhanced benefits if their employees work in a hazardous environment that may put them at greater risk of injury, illness or death.
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Who gets the death-in-service payment?
Death-in-service schemes ask members to nominate beneficiaries who will receive the money. If you are eligible for a death-in-service benefit then it is important to ensure that you have nominated beneficiaries. Speak to your HR department to do this. It is also a good idea to let beneficiaries know about this benefit in case there is a need to claim in the future. Death-in-service benefits are usually paid through a discretionary trust. It would then be the duty of the trustees of the trust to ensure that the benefit is distributed according to your wishes, meaning that your beneficiaries receive the payout.
Does death-in-service form part of your estate?
If you nominate who you wish to benefit from a death-in-service payout then the payment is made through a trust and the claim money should not form part of your estate. The tax-free cash lump sum is paid from the life insurance company into the trust associated with the life insurance scheme. The trustees then distribute the money according to your instructions which means it is normally passed on to your family or the people you nominated without any tax applied.
Is death-in-service benefit taxable?
Inheritance Tax
Death-in-service payouts provide tax-free lump sums that are paid into a discretionary trust and then onto your beneficiaries avoiding going through probate. Probate is the process whereby your estate is assessed and distributed amongst your creditors and beneficiaries upon your death. Avoiding probate helps to avoid the delay often caused to families receiving money. It also means that the money won't be liable for inheritance tax, which is calculated by working out the value of your estate against the allowed thresholds.
Is death-in-service a benefit in kind?
Death-in-service benefit is not considered a benefit in kind and there is no tax payable under your P11D taxable benefits for this type of benefit.
Can employee life insurance be a business expense?
Businesses can include the cost of a group life insurance scheme within their expenses. This offers the advantage of saving corporation tax as the life insurance expense reduces the company's taxable profit.
Does death-in-service count towards the lifetime allowance?
A lifetime allowance applies to the total value of pension benefits you accrue during your life. This value will include any death-in-service benefit based on the way your scheme is arranged. Your lifetime allowance is currently £1,073,100 and any amount that exceeds this level can be subject to taxation at a rate of up to 55%. The Treasury announced plans to abolish the lifetime allowance on 06 April 2024 so for the time being we will explain how this works under the current pension taxation rules.
Where your death-in-service cover is paid through a registered group life insurance scheme, it will form part of your lifetime allowance alongside the value of your pensions excluding any state pension.
Those people whose death-in-service benefit will push them over the lifetime allowance threshold should look at alternative ways to arrange it. A registered scheme may not be the right solution for them.
Relevant life insurance is a type of life insurance that can be paid for by your employer and is an alternative as it does not count towards your lifetime allowance. You can read more about it in our article "What is relevant life insurance and should you have it?".
Alternatively, excepted group life insurance schemes are arranged outside the registered pension framework. This means that they are not assessed against the lifetime allowance. These can be another useful alternative to any company where the employees are concerned about exceeding their lifetime allowance.
Companies looking to arrange life insurance for their employees should speak to a specialist life insurance adviser* to understand all the options and the impact of their choices on the lifetime allowance and resulting tax implications.
Can death-in-service be used for mortgage or family life insurance?
Death-in-service benefits will provide your dependents with a sum of money in the event of your death. If your employer offers a death-in-service benefit this may be sufficient to pay off a mortgage and support your dependents in the event of your death. This could potentially reduce the level of life insurance that you need to buy personally and save you money while offering you and your family peace of mind. However, you should consider the following before you decide to do this.
Firstly, consider the fact that your death-in-service benefit is reliant upon your continued employment under the contract that provides it. If you leave the company or change jobs, you may forego the benefit. Often people forget to review their life insurance arrangements in these instances and this could leave your family with less money than they need should you die. Secondly, you should consider the fact that any of the benefits that your employer offers can change, potentially leaving you underinsured.
If you want to ensure that your dependents will not struggle financially in the event of your death then you should ideally arrange life insurance separately.
Having said that, if you are someone who, because of poor health or personal circumstances, is struggling to secure personal life insurance, then a death-in-service benefit can help you get life cover without the need to disclose any health information.
Death-in-service vs life insurance
| Death-in-service | Life insurance |
| Pays out if you die | Pays out if you die |
| You can nominate your beneficiary with a nomination form | You can create a trust to nominate your beneficiary |
| Your employer pays for your life insurance | You pay for your life insurance |
| Your life insurance will stop if your employment benefits stop | You can choose how long your life insurance will cover you |
| The amount of life insurance is usually limited to a multiple of your salary | You select the amount of life insurance and can be as much as is justified by your financial circumstances |
| Your beneficiary can use the life insurance benefits for any need | Your beneficiary can use the life insurance benefits for any need |
How to arrange suitable death-in-service benefits insurance at the best rates
Businesses, just like individuals, should look to arrange the best policy at the best rates when it comes to arranging employee life insurance. It is widely acknowledged that these types of benefits can help with staff retention and in certain industries are an expected part of the remuneration package.
If you are an employee and wish to supplement your death-in-service benefits with some personal life insurance this can be arranged by life insurance specialists who arrange both business and personal life insurance policies.
With so many life insurance companies offering this type of life insurance, it can be a laborious job to understand all the terms and conditions and value for money that they provide. At Money to the Masses we have researched the market and the best way to navigate this minefield is to speak with a life insurance specialist adviser*. The adviser will take the time to understand your business before providing the most suitable and cost-effective solution for you. This can save time, money and provide reassurance that your scheme is set up appropriately.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch