Death in Service vs life insurance: which is better?
Your employer may offer you a benefit known as ‘death in service’, which would pay out to your loved ones if you were to die while employed there. But how does this differ from ordinary life insurance – and is it a substitute? Michael Englefield of Drewberry helps you weigh up the options.
Employee benefits can be a big factor in choosing which company to work for, and death in service cover is a particularly valuable benefit – especially if you have children. Knowing that your family wouldn’t be left without resources in the event of your untimely death is a great reassurance, even if you hope you’ll never have to make use of it.
You can of course achieve the same security by taking out private life insurance, but you have to pay for that yourself. The advantage of death in service cover is that for you, the employee, it is free. But does that make it better overall? Let’s find out.
The advantages of death in service cover
The fact that your employer owns and pays for the death in service policy has a number of additional benefits. Firstly, most employees won’t be medically underwritten for this cover. If you take out private life insurance, your medical history could affect the cost of your premiums, especially if you have pre-existing conditions. This usually isn’t the case for death in service – you’re covered anyway.
Another benefit is that death in service is automatically written into trust from the outset. This means that if you die, the money is paid into a company-owned trust which then distributes the funds to your family. The result is that there won’t be any inheritance tax on the benefit, which there might be on a life insurance payout if you neglected to write it into trust (you can find out more about doing that here).
So… free for you, and out of reach of the taxman – it’s no wonder death in service is such an attractive employee benefit. So what’s the catch?
The limitations of death in service cover
As valuable as this cover is, it’s important to realise that it does have some drawbacks. Furthermore, for most people it would be unwise to rely on death in service cover entirely, without any other kind of life insurance.
The first drawback is that the payout may simply not be enough. Usually the sum is linked to your salary – typically between two and four times your gross pay – and this could be insufficient to ensure your loved ones have proper coverage if the worst should happen.
‘Especially if you have a mortgage, by the time debts and funeral costs are deducted from a death in service payout, there may be little left to meet your family’s needs going forward,’ says Rob Harvey, Head of Protection Advice at Drewberry. ‘With personal life insurance, you can choose an amount that suits you, ensuring major liabilities such as mortgages are covered, while also having a sum left over for family protection purposes if you wish.’
What about when I leave my job?
A potentially even bigger issues is that your death in service cover only lasts as long as your employment does. If you’re made redundant, or leave for another job without this employee benefit, then you’re no longer covered in the event of your death.
‘We often see people coming to us later in life who no longer have death in service and want to replicate it with a personal policy,’ says Rob. ‘However, if you’re older the cost of protecting yourself really creeps up, especially if you’ve developed a health condition. Although an independent insurance adviser should still be able to find you the best deal possible, it will never be as cheap as it would have been if you’d had personal life insurance from day one.’
None of this should detract from the positives of having death in service cover – if you can find an employer that offers this benefit, it should be a significant factor in your decision. At the same time, remember that this kind of cover has its limits. Consequently, it can be sensible to have personal life insurance in addition, to ‘top up’ the benefit if necessary. Although you have to pay for this extra cover out of your own pocket, it may be well worth the cost to ensure your family’s future is fully secured if the worst should happen.
Drewberry is a fast-growing UK financial adviser with offices in London and Brighton.