Article on: Death On Service Benefit
'Death in Service' Benefit (DIS)
'What does Death in Service mean'?
What does Death in Service mean? (DIS) It is a payout to your family or nominated beneficiaries or ‘eligible dependants’, during your time as the employee of your firm ie; death in service (DIS).
Whilst some death on service employer schemes are open to all their employees, others are just tied into being part of their main pension scheme also.
As such, if you choose to opt out & have your own private pension instead (so no longer an eligible member of the main pension DIS scheme) then if you died, your beneficiaries may receive nothing.
Dependent on the employers' death on service scheme rules, this payment can be paid anytime ie; if you died during work hours, outside working hours or even on holiday.
'Death in service benefit' is usually paid out as a 'one off ' tax-free lump sum. It is calculated as a multiple of your annual salary eg; 3 or 4 or 5 x annual salary (but all dependent on the employers scheme rules).
Or, your employer instead may add additional features onto their T&C's as to what does a death in service mean eg; If you died as a result of a work related accident caused by your 'job role' (not natural causes) they may choose to also pay an additional amount based on 'x' yearly salary.
Some death on service schemes may also payout earlier if you become defined as 'terminally ill'. The DIS terms could allow to take your insurance for death benefit immediately & whilst still alive as a lump sum. However, this payout is usually subject to certain HMRC conditions.
Or alternatively, the employers then places instead restrictions on T&C's whats death in service mean eg; Armed Forces Benefits are only usually paid where death has occurred in service or (within 7 years from when their service ends).
Let's have a look at some 'death in service' example claims.
Example A You have only worked for the company for a few months but sadly died of a heart attack. Your starting salary was £45,000 at the time as a new sales manager.
Your 'death in service cover' scheme rules state your surviving partner or nominated beneficiaries may now receive a payout of 4 x yearly salary ie; £180,000 'death in service payment'
The DIS scheme will also pay a one off lump sum ex-gratia payment of £5,000 to help towards funeral costs.
Example B You sadly died in accident at work but caused more specifically by the risky nature of the contractual job you were taking on, as an installation electrician. You had just had a recent wage rise to £48,000 salary also.
Your 'death in service cover' scheme rules state your surviving partner or nominated beneficiaries normally would receive a lump sum of 3 x yearly salary. However, instead they may now receive a payout of 10 x salary ie; £480,000 'death in service payment'.
This larger amount was due to the specific DIS terms clause that the cause of accidental death of their employee was in the course of their normal job role death on service, rather than just via natural causes.
Dependants Pension & Death on Service
Most employers now legally have company pension schemes. These may vary from defined benefit to defined contribution schemes.
Some death service schemes may just payout a single lump sum only - but that is not necessarily the end of the employers commitment. For many death service pension schemes, there is also opportunity to receive an ongoing dependants' pension.
These 2 main Pension types vary as to explaining any death of service claims:
- defined contribution - a workplace pension fund (based on how much is paid in)
- defined benefit - a workplace pension (based on your salary & how long you have worked for your employers) sometimes also called a Final Salary Pension
Defined Benefit | Final Salary 'Death in Service Payment'
Once very popular, these employers final salary pensions schemes (like 'death in service nhs') have lost popularity with large employers, due to their enormous costs to maintain before & after retirement.
However, one of their benefits is the staff death service treatment eg; death in service nhs pensions or Local Government may apart from the death of service lump sums, also payout on ongoing dependants pension via their death on service benefits T&C's.
The main pension rules governing defined benefit style pensions in death, is whether or not you were retired before you died. The tax treatment of death service payments will be taxed at their marginal rate of income tax.
For example: here are typical dependants 'death in service pension' terms via a final salary style pension.
'Employers may pay an adult dependants' pension to a surviving spouse (widower or widow), legally registered civil partner, a qualifying nominated partner you advised to get an adult dependant's pension. Additional child benefit for legally registered or adopted children of the employee maybe payable until age 21 or end of higher education. This death in service pension is then payable for the life of your surviving partner.'
Defined Contribution | 'In Service Death Benefit'
Defined contribution types of scheme are now the most popular style of uk pension, due to their lower costs & changing uk legislation employer/employee rules.
For example: here are typical dependants 'death in service pension' terms via a defined contribution schemes style pension ie; similar to 'death in service nhs pension'.
'In service death benefits' are usually tax-free if the member dies when they are under 75, they are settled within 2 years of the scheme administrator becoming aware. After 2 years the lump sum maybe subject to a HMRC tax charge. The lump sum tax status is dependent on being within the member’s lifetime allowance. Death benefits are taxable if the member dies after reaching age 75. Lifetime allowance rules will apply. Charity lump sum death benefits may be available.
How is 'In Service Death Benefit' paid out?
As a 'death in service payment' is usually a large amount of money, it is often paid into a specific death of service trust & with assigned trustees.
These trustees will then decide precisely where the 'death in service payment' is then paid out to. Ultimately, these trustees will then have both broad discretion but often and importantly often the final say re this death service payment.
Employees however can set out who you they want to receive their death monies should you pass away, for example through a nomination of benefits or wishes letter.
This may be beneficial too. It could be that your personal & family situation has changed since you initially started working at the employer. In this instance, the trustees can act on the latest information they have about you eg; You have got divorced or got married.
However, in certain circumstances, it can be possible to challenge legally a decision made by Trustees in exercise of their discretionary powers....
For example: A married employee's wife dies, leaving him with 3 young children. So they notify their personnel section to remove their late wife as a beneficiary of their death in service.
They advise that their employee now leaves an updated nomination of benefits or wishes letter. So they do & this time requesting all the death on service benefits to now be paid equally amongst their 3 young children (rather than their late wife).
Several years later on, the employee re-marries again. However, they forget in this process to now re-advise their employers trustees via their personnel section of any change of wishes between the 3 x children & their new married partner.
A few years from retirement they sadly died at home & their bereaved wife now advises the firm trustees of their death. The 3 x children meanwhile are now all grown up & married themselves.
However, the trustees decide to just follow the employees original letter of wishes and make all the 'death in service payment' to their late employees 3 x children (as originally requested).
So the recently bereaved wife now legally challenges the trustees & complains directly to the Pensions Ombudsman. The Ombudsman instead upholds the employee's late wife complaint case on the basis that the 'death in service' trustees had not actually considered that the bereaved wife is also now a possible major dependent.
The Trustees in this example case had also not actually thought to investigate what is a death in service policy for their overall financial situation re their late wife. Also the full extent of dependency of the 3 x married children beneficiaries.
Is my 4 x 'Death in Service'....Enough?
Death on Service
This is a good question & one we are often asked as life insurance brokers; 'Is my 4 x death in service....enough' - or do we need more?
With rising monthly household bills & pressed family budgets into these Pandemic 2020’s, most people are naturally looking to save or not spend money if not needed. This is understandable.
However, if you have people dependent on you, then you need to take a long hard look at your total DIS benefits & circumstances, before dismissing the idea.
Although Death in Service seems like a free (often invisible) benefit...most insurance for death plans can often start from as low as £5pm via Leading UK Life Insurance Companies.
But let’s turn the question around & ask instead the advice of Money Savings Expert (via its well known founder Martin Lewis).
What is Martin Lewis' Best Formula | Death on Service (DIS)?
The Money Saving Expert (MSE) Martin Lewis has become the 'go to person' for all matters financial. His insurance guidance help is often followed by many people.
He was appointed both OBE & CBE in the Queen's honours list, as a thank you for his services rendered to the UK public.
For Martin Lewis on Life Insurance, his ideal insurance advice is for a good rule of thumb is to use the 'THE 10 x RULE' (ie; 10 x your annual gross yearly income).
His basic MSE cover death on service style formula is to therefore aim to cover '10 x the Annual income of the highest earner or main breadwinner - until any kids have finished full-time education.
Using that principle, if you earned £45,500pa gross, he says you should maybe consider insuring yourself (after any mortgage, loans & debts are repaid) for @ £455,000 life insurance (ie; 10 x the annual gross income).
Interestingly, he recommends just insuring your gross income of £45,500pa - but not get complicated with calculating net after tax incomes. We will therefore use this formula for a death of service example calculation.
'Death in Service Insurance' vs Life Insurance
What happens if your work provides you 4 x yearly salary 'death in service insurance' ie; £45,500pa x 4 yearly income = £182,000?
...Is my 4 x yearly salary paid via my death in service scheme, actually enough for my family to live off if I died?
BUT if we are now using the Martin Lewis of 10 x yearly salary formula above, then £45,500pa x 10 yearly salary = £455,000.
SO if we take that into account....then should the shortfall be to actually insure the remaining 6 x annual income death in service? ie; £45,500pa x 6 yearly salary = £273,000
Following on from this basic MSE example formula above, what happens if you then worked for the next 22 years until retirement?
You could potentially earn around £1 million gross ie; £45,500pa x 22 years = £1 million [or more with any future inflation wage rises].
Apart from losing a loved one, this real hidden income threat is what could be lost if the main breadwinner died prematurely.
As such, unlike the simple Martin Lewis 10 x £45,500 gross salary insurance example - you could instead protect your family with either;
- Income = £3,791pm or £45,500pa family income benefit lifecover policy
- Lump sum = £1 million level term policy [if invested @4.55% = £45,500pa]
- Or a mixture of the 2 policy types over the next 22 years - all dependant on your family life circumstances.
Neither 'death in service insurance' formulas takes into account repaying any mortgages, loans or debts.
- You can decide wether you want the cover to be level or inflation linked
- Single plan | 2 x seperate plans | Joint life insurance 1'st claim | Lump Sums or Family Income Benefits options
So, as Financial Advisers we are not saying this Martin Lewis formula of 10 x annual salary is therefore a 100% one size fits all ie; not applicable for everyone's own personal family or business life situation.
You may also feel your existing death in service is either not enough cover, or perhaps too much for your own circumstances, if trying to be money savvy on your insurance protection decisions.
So, I would re-summarize the Martin Lewis 'death in service insurance' protection formula as follows...
That is to ideally 'Protect 3 Things'...
- LUMP SUM > Repay any mortgage & debts, final expenses costs
- INCOME > Help to cover all your monthly bills
- LUMP SUM > Back up Plan for holidays, education, emergencies
Our 'death in service insurance' formula is naturally dependant on wether you are married or cohabiting, have young or old dependants, retired or both working still. Have sufficient backup already in any investments & savings.
Ultimately, the ideal insurance amounts to cover are also down to your budget. This calculation could also be made harder due to any pre-existing health history or lifestyle issues, meaning possibly higher ‘rated insurance premium’ costs. Contact us for personalized advice.
Let's now look at 3 main advantages & 3 main disadvantages of any typical Death in Service Benefit (DIS)...& in no particular order.
Pro's: 3 x Advantages of (DIS)?
- Usually offered free of charge & then 'usually' paid out tax free at death via trustees
- If you have any adverse pre-existing health issues eg; heart or cancer issues (then you have cheap life insurance)
- Often 'in service death benefit' increases as a 'multiple x your salary' via any regular wage rises
Cons: 3 x Disadvantages of (DIS)?
- You are lulled into thinking that their x yearly salary formula 'death in service cover' now correctly provides sufficient for all your family needs
- Should you leave the employer (not just retire) then you may not be insured anymore if you died
- If you change jobs, your new employer 'if' they also offered death on service, their salary multiples (you had relied upon) may now be far lower
Insurance Brokers (DIS) FAQ
Insurance Cover UK Types
We will now look at 6 x different types of death in service insurance alternatives, if you are concerned that you are inadequately insured.
These are all typically what are available in the UK market place, should you wish to consider concurrent life insurance protection, to run alongside your existing employee DIS benefits.
- Level Term
- Increasing Term
- Family Income Benefit
- Decreasing Term
- Whole of Life
- Over 50's
The first 5 x types of life insurance policies listed are all fully underwritten. This means, Insurers usually ask a full range of both personal and family medical & lifestyle questions before offering any terms.
This may also require a nurse medical & GP reports. Any health history issues either personal or familial, could increase the premiums.
Once a deal is then agreed and onto risk, you are then insured immediately, which means no waiting periods before any full claim payouts.
The 6th type of policy listed asks no medical questions & requires no GP reports to qualify. However, to do so means there are waiting periods. Most plans will also include free 'terminal illness' cover.
All Policy payments are usually paid free of uk income tax. However, they could be subject to UK Inheritance Tax.
1] Level Term Cover
Level Term Insurance policy: The amount of lump sum payout remains the same (or level) both from the start to the end of the plan. This could run concurrent with your death of service cover, although it is level meaning over time inflation would erode values.
In other words, if the level term life insurance was setup for say £375,000 and you then died in year 18, it would still payout a £375,000.
However, as it runs for a specified term eg; 25/35/45 years, then any death claim payout will only be within that time frame. So if your plan ran for 37 years, but you died in an accident in year 37 & 3 months, then the plan has ended, so it would not then payout. You can take a term policy upto age 90.
Note: You could choose a convertible or renewable life insurance lump sums option from outset within this plan, allowing the choice to either replace it with a whole of life insurance or another plan, without health evidence. You may also have the option to include critical illness cover benefit.
2] Increasing Term Cover
Increasing Term policy insurance: The lump sum amount of payout cover may increase annually from the start to the end of the plan (to help offset rising inflation). This could also run concurrent with your death of service cover, & as may increase alongside any wage inflationary rises.
You can choose whether this increase is by Average Earnings, RPI or a fixed rate ie; 5%. This means the payout risks to the UK Life Insurers also increases from start to end. So some Insurers therefore charge an extra premium from outset, to account for this increasing & rising insurance risk, without asking for ongoing medical evidence at each increase.
For example, if an increasing term life insurance was originally setup for £50,000 over 30 years but you died in year 17, it may now payout around £75,000 (due to increasing by say RPI).
The same rules apply as above re time frames and any lump sums claim.
3] Monthly Family Income Benefit Cover
Family Income Benefits plan [FIB]: This insurance pays upon claim a tax-free monthly income, within the agreed policy term. Some FIB plans you can opt to be paid the uk death benefit quarterly or annually at claim. You may also have the option to include critical illness FIB benefit.
With a family income benefit policy, works abit similar to mortgage decreasing cover. This means the regular monthly income payout period decreases over time from policy start to end, but the premium remains level. This could also run concurrent with your lump sum death on service cover giving the benefit of providing income on death.
For example: If a FIB was setup to pay £1,500pm over 18 years term to help cover your children (whilst still dependant) but you died in year 13. Then, it would just payout £1,500pm for the remaining 5 years & then the plan would end.
4] Decreasing Term Cover
Decreasing term death insurance on mortgage: The insurance payout cover slowly reduces, from the start to the end of the plan but the premium remains level. Usually decreasing plans are used for Mortgage Life protection or Loan repayment ie; It follows the reducing debt over its term.
For example: if a mortgage policy was originally setup for £277,000 over 30 years (to protect a £277,000 repayment mortgage agreed also over 30 years) but you now died in year 20. The decreasing plan may now payout say around £140,000 ie; the 'death insurance for mortgage' has decreased inline around what you may owe on your mortgage.
5] Whole of Life Cover
Whole of Life 'death insurance policies': The life insurance death benefit amount will always payout, whenever you die (as long as the premiums have been paid & all policy terms fulfilled).These are therefore unlike term plans your death in service payment (which only runs for a set term period). This type of cover could also run concurrent with your lump sum death on service cover giving the benefit of providing lifetime life insurance.
For example: if the death policies was £30,000 & you then lived amazingly upto aged 195...it would still payout ie; £30,000 is essentially guaranteed.
6] Over 50's No Medical Cover
Over 50's no medical 'death policies': These are also rest of life or whole of life (meaning ongoing cover). However, there are usually no in depth medical & lifestyle questions to qualify. Note: Smoker or vaper status is still asked & this affects death policy insurance pricing.
However, because of fact there are no medical questions, then there are usually 1 or 2 years initial exclusion period before any full natural death insurance claims.
Typically Insurers in this period offer a refund of premiums only if you died of natural causes (during this exclusion period). Insurers may often stop taking premiums from age 90/95 - but maintain your 'insurance for death'.
Generally, these are not as good value compared to underwritten whole of life (Type 5) but are useful if you do suffer from some adverse health issues eg; high BMI kg with raised cholesterol & blood pressure. This may mean it maybe difficult to get affordable underwritten terms.
Death Service & Disclosure
Should you take out a separate life policy to your death in service scheme, when filling an application you may ask 'how would the Insurers even know if I just have the odd cigarette per week or maybe occasionally vape'?
You may have noticed that the Insurers 'smoking rate premiums' are that much more expensive - if I just tell them I don't smoke, what does that mean?
What happens if you didn't tell the Insurers anyway about having a familial disease (what ever that means) as they are asking about me, not about anyone else?
''I am a busy person, so don't usually bother seeing my doctor if I had any health issues, I just get on with life mate...but I am sure everything is all okay, so I don't need to worry'.
They didn't ask any long application questions like this for my death of service benefit.
The Insurers may not necessarily even request any medical nurse tests or even write to your GP upfront, to query your insurance application when you apply.
However, they will probably do so if any death insurance claim then comes in, to fully assess the validity of your situation re a claim.
Note; Most Insurers should always send you a copy application (by e-mail or hard copy) of what you initially disclosed, for you to then carefully recheck. If you think anything is wrong, then you need to advise them asap.
The original death certificate once requested by the Insurers may then highlight that it was caused by 'smoking related factors.' Alternatively, it may point to the fact that a heart attack from someone at such an early age in their early 40's was likely due to their 'hereditary health history' issue of familial heart disease.
The last thing your family & dependants would ever want, at their worst moments, is to have to be told by the Insurers' the your insurance policy death claim is now sadly invalid. That the information you gave at the time was found inaccurate ie; misrepresentation.
Remember, if you were paying £28pm to 'correctly insure' or just £18pm 'maybe incorrectly' for £175,000 life insurance, then which is the smarter insurance move? Who has the GREATER RISKS ?
The Life Insurance Company who may have to pay out a £175,000 death insurance policy claim .....or your Family because they unfortunately didn't !!!
What if my Health changes after taking the policy?
Any health or lifestyle changes since, usually does not void your existing 'death in service insurance' top up cover if it wasn't relevant at that time of initial application.
It maybe the Insurers request GP reports when you originally applied, to check any health details disclosed. Likewise they may not.
So take care to doubly re-check on your original application what you initially disclosed to the Insurers, as this information then stands now and in the future. Please check your original uk death benefit T&C's.
Death in Service Conclusion
I hope that gives a brief background as to different types of what 'in service death benefit' is and why you should consider taking more cover out. Please check out & Compare Online Broker only deals here.
If family members are dependant on you, then you know it makes good sense
Article on 'Death in Service Benefit' by Martyn Spencer Financial Adviser (2024)
Death on service Benefit
Note: All comments are generic & not to be seen as advice on company pension schemes. We do not advise on final salary defined benefit or defined contribution death in service plans. We may refer you to an IFA.