Death in Service – How does it work?

Many employers offer a death in service benefit, which will pay your dependents a lump sum if you die while still employed. In this guide, we’ll tell you everything you need to know about death in service, what it is, how it works, and how it differs from life insurance.

Yugi the Giraffe - 27 October 2021

What is death in service?

Death in service is a form of benefit that's provided by an employer. If your employer has chosen to offer this benefit, it means they’ll pay out a lump sum of cash if you die while you’re employed by the company in question. Usually, you just have to be on the payroll in order to be eligible, and your death doesn’t have to be work-related.

In the event of your death, a nominated beneficiary will receive a tax-free lump sum. This income can be hugely beneficial to a grieving family and help cover daily bills such as food, rent, school fees, funeral costs and more.

How much do you get for death in service?

The amount of death in service benefit paid out depends on the package in question. The cover typically pays out between three and five times your annual salary, but some do pay less. The exact amount received will therefore depend on your income as well as the terms of the policy.

For example, if you earn £40,000 a year before tax and your death in service policy pays out five times your salary, your family will receive £200,000 in the event of your death. If you earn £50,000 and have a policy offering a three times salary payment, they will get £150,000.

With death in service benefit from YuLife, you can either be covered for a multiple of your salary (up to 5x) or a fixed amount (maximum of £500,000), as long as it does not exceed 5x salary.

Is death in service the same as life insurance?

Death in service benefit and life insurance are similar in that they both provide a financial cushion for your family in the event of your death.

Having death in service cover is certainly a positive. But, while the money paid out by the benefit may seem like a lot, it can be eaten up very quickly by things like funeral costs and mortgage repayments. It’s therefore important you think about your individual circumstances and consider whether up to 5x your annual salary would be enough to support your beneficiaries or loved ones.

Most life insurance policies pay out up to 10x your annual income, which is a lot more than even the most generous death in service benefits. It is common that some people will use death in service and also apply for life insurance as a way to ‘top up’ and help pay off their existing mortgage. Premiums will often be lower too if you have a death in service insurance policy already in place.

Who gets death in service payment?

Death in Service Benefit will pay out the lump sum directly to your chosen beneficiary, or into a discretionary trust that then pays it to your loved one. Either way, it’s important to nominate the person you want to receive the money should you die unexpectedly.

How long does death in service take to pay out?

The time it takes for your loved ones to receive the money from your cover will depend on your employer and the terms of the death in service policy. If everything goes smoothly, the payout can be made in as little as two weeks – but some families might have to wait a month or more for the money to come through.

Is death in service taxable?

The money received from a death in service scheme is a tax-free lump sum. Companies achieve this by keeping the policy in trust and paying any money to families via that trust, thereby sheltering it from Inheritance Tax.

Does death in service form part of estate?

By paying the money from the cover to nominated beneficiaries via a trust, the death benefits do not form part of your estate and are therefore not chargeable to Inheritance Tax.

Does death in service benefit count towards lifetime allowance?

The lifetime allowance is the limit on how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefits. If your pension pot exceeds the allowance, which is currently £1,073,100, you’ll pay a tax charge on the excess.

Lump sum death in service benefits count towards the lifetime allowance and any employee whose lump sum takes them over the allowance will be affected, particularly high earners with death benefits based on a high multiple of salary. The tax charge is payable when the benefits are paid to their beneficiaries.

Does death in service cover cancer?

Death in service pays out a cash sum if you pass away while employed by the company offering the benefit. So, if cancer is the cause of death then, yes, it is covered.

If your employer also provides Critical Illness Cover, then you’ll have further financial protection in the event you’re diagnosed with cancer.

Yugi the Giraffe

Yugi is our YuLife mascot. Like all giraffes they've got a big heart – in fact the biggest heart of all land animals.