One of the most frequently asked questions is whether, if you have taken out death in service cover, or if your employment benefits cover you for a death in service insurance, do you need to take out life insurance.
What is death in service benefit?
This is similar to life insurance but there are key differences.
In the event of your death while working for your employer your death in service benefit will pay out a lump sum.
As with life insurance, the pay-out will protect your family and beneficiaries after your death so they can pay the bills and maintain the financial commitments which would otherwise have been paid by your income.
It’s important to understand that the money cannot be used directly to pay for a mortgage; it may have to be paid into a discretionary trust, which would mean you have no part in the decision-making for the recipient of the funds.
From between two times to as much as four times your salary can be paid in this way upon your death. However, death in service cover is not always advantageous to all.
You would automatically lose any death in service benefit set up as an employee package if you leave the company and are no longer on the payroll.
With some policies, being part of the company pension scheme will be required for death in service benefit as well as being on the payroll.
Do I need life insurance if I have death in service cover?
Death in service cover is usually an added benefit that requires no extra input or payment from you apart from the condition that you continue to work for the employer who provides it.
On the other hand, life insurance comes with a monthly or annual premium.
Advice
Before you decide, get advice and think carefully about the pay-out you will receive. Will this be enough for your family to meet your existing financial commitments, in the worst case scenario, after your death? Typically, this may mean long term mortgage repayments or credit card commitments and it’s as well to be prepared and weigh up the pros and cons.
Pay out
The pay-out from death in service can vary between two and four times your salary depending on the scheme you are under. Bear in mind, too, the cost of a funeral service and any other routine administrative costs liable upon death. It is better to look at higher than this figure such as eight to ten times your salary on pay-out to cover all essentials. You can top it up to meet this figure if you wish.
Death in service is beneficial whilst working for a company but it will not cover every circumstance or help you in the same way that life insurance does. There is not much room for flexibility and you cannot assign the pay-out directly to a mortgage or specific beneficiaries as in a Will.
Flexibility
With life insurance there is more in-built flexibility and you are better covered but you have to pay the monthly premiums yourself.
You can assign a pay-out specifically to a mortgage debt or another loan and decide the benefactor. It is not tied to your job so if you lose your job, your life insurance remains intact.
Value
When you combine it with death in service it should work out cheaper than taking out a full life insurance plan, with the added advantage it will offer better cover than death in service alone would.
Look at the different options for life insurance, such as decreasing term: this lowers the premiums and the pay-out as you approach the end of the policy term. Level term pays the same if you die during the term. Whole of life pays out whenever you die.
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