Death in service cover vs. life insurance

Do I need life insurance if I have death in service cover?

Would your family and loved ones be able to cope financially if you were no longer around? Do you need life insurance if you already have death in service cover?

Read our guide to learn more about the differences between death in service and life insurance and find the best option for you.

What is life assurance at work?

When you're employed by a company, one of the common benefits offered as part of your employment package is a Death in Service benefit. This is also known as life insurance or life assurance at work or it may be referred to as employer life assurance.

It means that if you die while you're an employee, your employer will pay out a lump sum to your family or nominated beneficiaries. You do not have to die at work, just while employed.

You may not be eligible for this benefit if you work for the company on a consultancy basis or freelance basis, as it's usually only included as part of the package for people who are on the employment payroll. Sometimes it is only available to members of the workplace pension scheme.

If you don't know if you have death in service benefits at your workplace you can ask your human resources or pension department who will be able to explain what cover you have, if you have it.

Do I need life insurance if I have death in service?

If you have a death in service benefit with your job or your employer is offering you death in service, you may still need life insurance in the future.

We explain what death in service cover is and how it differs from life insurance, so you can get the information you need to plan your financial future.

What is death in service benefit?

As part of an employer's benefits package you might get death in service, which is like life insurance but has many key differences.

In summary, if you die while employed, your death in service benefit will pay out a lump sum. Like life insurance you would use your death in service benefit to protect your family and loved ones after you die so they can continue paying the bills and keep up with financial commitments that your income might have otherwise been able to cover.

However, the money can't be assigned directly to pay for a mortgage, and in some cases it will be paid into a trust, to ensure you family does not pay inheritance tax on your money.

How much does employer life assurance pay out?

Death in service benefits usually pay between two times to as much as four times your salary upon your death, but there are some drawbacks to death in service cover.

If you're no longer on the payroll at your company then you lose your death in service benefit. You must have been employed by the company and on the payroll at the time of your death for the benefit to come into effect.

With some death in service policies you will need to be part of the company pension scheme, so as well as being on the payroll you will need to be an active member of the pension scheme if the death in service benefit requires it. You can check the small print and whether you qualify for death in service benefits by asking your HR or pensions department at work.

Do I need life insurance if I have death in service cover?

If you have death in service as a benefit from your job then you may ask yourself whether you need life insurance.

Death in service cover usually comes as an added benefit that requires no extra input or payment from you aside from continuing to work for the employer who provides it. Meanwhile, life insurance comes with a monthly or annual premium.

But it is not all about the cost. You should consider the practicalities, such as the payout received and ask yourself if your family and loved ones will still be able to keep up with your financial commitments after you die.

Death in service benefits can pay between two and four times your salary depending on the scheme, so if your salary is, say, £50,000 per annum, your family could receive a payout of somewhere between £100,000 and £200,000. Would that be enough for them? If not you may need additional life insurance.

Life insurance vs death in service – do I need both?

To work out whether you need life insurance versus death in service benefits, or whether it would be better to have both, you need to look at your family finances. 

Work out how much your financial commitments are when they are all added up together. Would your family still be able to manage under the worst case scenario if you were no longer around?

For example, say you have a mortgage with 25 years of payments left to make, and you die five years later while working at a company that provided you with a death in service benefit. Would that payout be enough to cover the remaining 20 years of mortgage payments?

What costs do I need to work out when calculating the need for life insurance?

Credit card bills and mortgage payments are not the only financial commitments your family may need to keep up with. Funeral costs are also a factor and other admin costs could come up when dealing with your death.

Before you decide if you need life insurance or not, calculate how much it would cost if you died, and at what stage. If you died later in life when most of your debts have been paid off, the cost might be lower than if you died young. But it is vital to look at the worst-case scenario first to be best prepared.

Should I get life insurance or death in service?

If you have financial obligations that could remain even after you die, such as a mortgage, then some kind of cover like life insurance could be crucial to your family.

While death in service is a really useful benefit when working for a company, it is often not enough to cover every circumstance or deliver in the same way that life insurance does.

For your family to be adequately covered after your death, your payout should usually be much higher than even four times your salary. Some financial advisers put the ideal payout figure at around eight to ten times your salary.

What are the pros and cons of life insurance and death in service benefits?

Death in service cover can be quite inflexible, prohibiting you from assigning it directly to a mortgage and preventing you from choosing your beneficiaries.

There is greater flexibility and coverage available with life insurance, but obviously this comes at a price, whereas death in service is an employer benefit and is usually offered at no extra cost.

Death in service is a valuable benefit, but if you want to make sure that your family is financially taken care of, then taking out additional life insurance could be helpful, especially if you have a lot of financial responsibility and dependants.

However, you can effectively "top up" your death in service cover by taking out the amount of life insurance you will need to make it a fully covered plan. If you have calculated how much your family would need to cover your financial commitments after you die, then you can take out just enough life insurance.

The idea is that when you combine it with death in service it should work out cheaper than taking out a full life insurance plan but cover you far more than death in service alone will.

How can my family use a life insurance payout?

With life insurance you can assign a payout specifically to a mortgage or a particular loan and decide who in your family will get the money. Also, if you lose your job your life insurance remains in place as it is not tied to your work. That means if you lose your death in service benefit as a result of changing jobs, retiring, or losing your job, then at least you will still be covered with life insurance.

There are also several types of life insurance, such as decreasing term (which lowers the premiums and the payout as you get nearer to the end of the insurance policy term), level term (which pays the same if you die any time during the term) and whole of life (which pays out whenever you die).

If you're working in a freelance capacity then it's important to arrange life insurance as you will not be able to benefit from any death in service options as you would need to be an employee to qualify.

*Based on £150,000 of level-term cover for 25 years for a 30-year-old non-smoking male with no pre-existing medical conditions (March 2023).

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