What is death in service benefit?

Last updated 28^th May 2024 by the SunLife Content Team
7 min read

Some employers provide death in service benefit as part of their benefits package or pension scheme. If you’re eligible and die while on your company’s payroll, it can provide your loved ones with some money.

The payout is often two to four times your annual salary. This is called a 'lump sum death in service benefit'. Or, your financial dependants could receive a 'Dependant's Pension'.

This article explains how to check your eligibility for death in service benefit. We also explore the different types and what to expect from one of these schemes. Plus, we look at how they compare to personal life insurance policies.

Am I eligible for death in service benefit?

The first step is to see if your company offers death in service benefit. You may have this information in your company’s policy documents. If you're unsure, ask your HR team.

Some companies offer death in service as a standalone benefit. But many offer it through their workplace pension scheme. If this is the case, you'll also need to check that you're signed up to that scheme.

Finally, see if your company has set up any other eligibility requirements. Again, if you can’t find the information, your HR team can help.

Different types of death in service benefits

Death in service schemes may provide two different forms of benefit:

• A lump sum death in service benefit
• A Dependant's Pension (but this is less common nowadays)

Lump sum death in service benefit

With a lump sum death in service benefit, your beneficiaries get a one-off cash payout when you die. The amount is usually based on your earnings. Often, it’s two to four times your annual salary.

The exact amount may vary from person to person. It will depend on things like:

• your pension scheme membership
• your job role
• your age
• whether your scheme’s payout is based on salary, or a fixed amount. For example, £100,000 per employee
• how your scheme defines ‘salary’ (it may refer to what your salary was on a particular date. And it may not include extra earnings such as bonus or overtime payments)

If you’re eligible for a lump sum death in service benefit, check your employee handbook or benefits scheme information. This should tell you how the payout will be calculated.

Dependant’s Pension

Some employers may offer a Dependant’s Pension. (This used to be known as a Spouse’s, Widow’s or Dependant’s Death in Service Pension.) But these are becoming less common.

If you die, this type of death in service benefit gives your loved ones regular payments in the form of a pension.

Make sure to check what is and isn’t covered with your Dependant’s Pension. If children are included as financial dependants, payments to them may stop at a specific point. For example, when they turn 21 or leave full time education.

If you have this benefit, check the fine print of your employee handbook or pension scheme.

How does death in service benefit work?

Death in service benefits should pay out if an eligible employee dies while on their company’s payroll.

The death does not have to happen at work, or be related to it at all. They simply need to be a current employee who qualifies for the employer’s scheme.

What happens if I leave my employer?

A death in service benefit is only paid out when a current employee dies.

So, if you die after you leave, your loved ones will not receive anything from that particular package. This applies no matter how long you worked for the company.

Sometimes, an employer may continue a death in service benefit temporarily. For example, if you are made redundant. This makes sure you remain covered until joining a new employer's benefit package.

The old cover may be provided for a set period of time after the redundancy. Check with your employer to see if this applies to you.

Will my loved ones have to pay tax on death in service money?

This depends on the type of death in service benefit you are eligible for:

• Lump sum death in service benefit schemes

  These are written under discretionary trust for tax efficiency. This means that your loved ones won’t have to pay Inheritance Tax(www.gov.uk opens in a new tab) on the lump sum.
  Any interest they earn on the lump sum would still be subject to Income Tax(www.gov.uk opens in a new tab).

• Dependant’s Pension

  This death in service benefit counts as a form of income and is subject to Income Tax.

Who receives death in service benefit money?

You choose the beneficiaries of your death in service benefit money. You can do this by submitting a Nomination of Beneficiary Form.

Lump sum death in service benefits are written under a discretionary trust. This means the Trustees can decide who receives the money. But in almost all cases, it will be paid to your chosen beneficiaries.

How long does it take to pay out death in service money?

Beneficiaries should receive a lump sum death in service benefit around two weeks to a month after their loved one’s death. Having all the paperwork done will help the process to move as quickly as possible.

If you have a Dependant’s Pension, the money will be paid to your chosen beneficiary based on the agreed timescale. Check your policy or ask your HR department for details on when the payments will be made.

Differences between death in service and individually owned life insurance policies

Death in service benefit is a type of group life insurance policy that’s covered by your employer. This means you won’t have to pay any premiums yourself (unlike with an individually-owned policy).

Lump sum death in service payments are not subject to inheritance tax. A personal life insurance policy payout would be subject to Inheritance Tax unless written in trust.

But, a death in service policy does not belong to you. So you can't use it for things like life insurance provision to cover the mortgage. Also, the company’s scheme decides the sum or pension that's paid out, not you.

Individual life insurance gives you more control. But it comes at a cost before your death in the form of premiums. For a regular fee, you can choose how much money you want to be paid out on your death. Plus, you get to choose the type of life insurance you buy.

If you are over 50 and want to look into your options further, you may find our over 50s life insurance page helpful.

Limitations on death in service benefits

A death in service scheme is a 'group' not an individual policy. So insurers may specify a 'non-medical limit' for the payout. This means that:

• If your death in service payment is less than the non-medical limit, you’ll be covered with no need for medical information.
• If your payout would be more than the non-medical limit, you may be asked for medical information. This is so they can cover you for any amount over the limit. This is called medical underwriting.

Death in service plans may also have a 'Catastrophe Clause'. This means that if a single event causes the deaths of multiple employees, the total scheme liability may be capped.

For example, if twenty employees die with a total benefit amount of £10 million, but the Catastrophic Event Limit is £5 million, the total payout would be halved. The Trustees would decide on how the benefits are paid.

Do I need death in service benefit and individual life insurance?

Individual life insurance can provide more certainty than death in service benefit. So it could be worth looking into, even if you’re eligible for a death in service benefit from your workplace.

If you’re eligible for a death in service benefit, you can use this to plan your personal life insurance needs. For example, you could combine two payouts, so the total is the right amount for your loved ones.

If your death in service benefit lump sum isn’t enough to cover a specific cost, life insurance could help to top up the total amount. This could help to ensure your beneficiaries are provided for after your death.

No matter how carefully you plan, your situation may change in future. If you leave a job that provides a death in service benefit, you might not have a similar scheme at a new company. You may then want to look again at your personal life insurance policy to make sure it will pay out enough for your loved ones.

Consider speaking to a financial adviser about important financial decisions.

What next?

Planning for your loved ones’ financial security after your death can give peace of mind. If you want to read more around how SunLife can help in this area, you could try the following pages:

• Over 50 life insurance
• Guaranteed Inheritance Plan
• Equity release

Or read more of our guides to help you manage your money after 50.