Thinking about what would happen after you die is never pleasant, but it is often necessary in order to properly provide for your loved ones should you no longer be around. It is essential to be prepared and ensure that your family can adequately cover your financial commitments.
One way of helping your family’s financial situation after your death is through death in service cover. Many employers offer this as part of their general employment benefits package. In order to ensure your loved ones will have everything they need, you should properly understand what death in service cover is, how much is paid out and how it differs from a life insurance policy.
What is death in service cover?
Death in service cover is an employee benefit that many companies will provide as part of their employment package. It means that if you are employed by the company when you die, your family will be paid a tax-free lump sum.
If you have death in service cover, then you don’t need to die while on the job, or as a result of a work-related activity, all you have to do is be legally employed by the company when you pass away.
Some death in service benefits are linked with company pensions, so you might only be eligible for death in service cover if you have also signed up for the related pension scheme.
When is death in service cover paid out and who receives it?
If you have an active death in service cover policy in place and you pass away, then your dependents will receive a tax-free lump sum of cash as a payout. Your death does not have to occur at work, but just while the company offering the benefit continues to employ you.
This tax-free payout might be paid into a discretionary trust, in which case the trustees will decide who the money should go to. Many companies will ask you who you would like to receive the payout in the event of your death. However, if it goes into a trust, then the trustees will have the final decision.
It is always worth checking the terms and conditions of your death in service cover to find out what will happen to the money if you die. If you have particular requirements for who should receive the payout, then you should let your employer know.
How much does death in service cover payout?
The amount that is paid out in the event of your death will depend on the type of death in service cover you have. In most cases, the payout is generally somewhere between two and four times your annual salary. This means, if you earn £50,000 a year at your employment, then the payout to your family would be between £100,000 and £200,000 depending on the cover you have.
The amount paid out will vary from employer to employer, so be sure to check exactly what the agreement is for your specific death in service cover.
Some employers might offer flexible employee benefits, and this means you may be able to increase the amount of the death in service payout by decreasing your other benefits.
How does death in service cover differ from life insurance?
Many people make the assumption that they do not need both life insurance and death in service cover, but it is important to understand the differences in order to decide which is the right choice for you.
At first glance, the payout from death in service cover might look like enough for your family to cope with in the event of your death. However, when you consider all the various costs involved when you die, that payout could be gone very quickly.
Relying on just death in service cover might not be enough to cover all your family’s financial commitments, such as paying off a mortgage or other debts.
In order to give your family a stable financial position after your death, you might consider additional life insurance on top of your death in service cover. Many financial advisors will recommend that your life cover pays out roughly ten times your annual income.
For example, if you are earning £50,000, and have death in service cover for four times your salary, your family will receive a payout of £200,000. You may then want to top this up with life insurance cover for an additional £300,000, to make a total payout of £500,000 for your family.
Bear in mind that you will only have death in service while that company employs you. If you change jobs, take some time off, or go self-employed, you will lose your rights to the tax-free payout.