Death In Service Insurance

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05-03-2021

Death in Service (DIS) is a cost effective company-paid life insurance policy. It provides your employee’s family or nominated beneficiary with a tax-free lump sum should they die while working for your business. The payout is typically between 2 and 4 times an employee’s annual salary.

How Does It Work?

In brief, the benefit:

  • Provides a multiple of salary / earnings as a death benefit (usually between 2 and 4 times annual salary, although up to 15 times is possible).
  • The death benefit is paid tax-free to an employee’s loved ones thanks to the trust set up with the policy.
  • Pays out no matter where the death occurs, whether this is on the job, at home or even overseas.
  • Helps an employee’s family cope financially if a staff member dies.
  • Is one of the cheapest group insurance policies to implement.

Is Death In Service Insurance Mandatory In The UK?

Although it’s usually the first benefit companies offer, it is not mandatory in the UK.

However, while it’s not something you must provide, offering a level of death insurance has plenty of benefits.

Benefits For Employers

The Chartered Institute of Professional Development (CIPD) reveals that
54% of people seeking a new job want better pay / benefits, saying this was the main reason for deciding to move.

Employee benefits are important to your employees and can help:

  • Attract and retain staff
  • Improve employee engagement
  • Reduce absenteeism, especially when coupled with an employee assistance program (EAP).

One of our clients Profile Pensions chose to set-up company death in service insurance for their employees to provide their team with a security blanket should the worst happen.

George Hay, an employee at Profile Pensions for 3 years said “I’ve just had a child, so it means a lot to have that peace of mind that if the worst happens, my family will be supported with four times my annual salary. It’s not something I hope will ever be needed, but it does take a big worry away for me.”

Benefits For Employees

Death in service life insurance provides financial security and peace of mind for your family in the event of your death. It is more important than ever given our recent survey found that only around 1 in 3 UK adults had any form of personal Life Insurance.

Many without Life Insurance say cost is a barrier to uptake. Having an employer pay could therefore be a big weight off of employees’ minds.

As well as paying out if an employee dies, there are a number of support services for employees that insurers often provide free alongside a policy:

What Is The Eligibility Criteria?

The first thing to consider when checking whether your company can take out employee Death In Service cover is the number of staff you have – typically, you need at least five employees to be able to put a scheme in place.

Employee eligibility

Employees also need to be eligible as individuals to join the scheme, so you’ll have to check that:

  • They’re within the minimum and maximum entry ages of the policy
  • They’re eligible to work in the UK and have a UK working contract
  • They’re an active employee at the company providing the insurance scheme.

Some employers add additional terms before including employees in policies, such as working for the company for a set period or being above a certain pay grade / status within the company.

You can set up company Death in Service Insurance so that senior staff members get a larger multiple of salary than more junior staff members if you so wish.

For Small Businesses With Less Than 5 employees

If your business is too small for group Death in Service cover, you may want to consider Relevant Life Insurance as it can be taken out for a single employee.

This offers similar tax benefits to a DIS scheme as the policy is owned and paid for by the business and corporation tax relief is available on premiums.

How Much Does Death In Service Insurance Cost?

Your Death in Service quotes will depend largely on the profile of your employees. Major factors that determine the cost include:

  • Employees’ ages
  • Staff salaries
  • Your industry
  • Total number of staff.

While premiums can vary considerably depending on your company and workforce, in the table below we’ve laid out example premiums based on the cheapest quotes for two recent clients.

Software Company

Health Services Company

Location

London

Barnsley

Employees

10

200

Cease Age

State Retirement Age

State Retirement Age

Level of Cover

4x Annual Salary

1 x Annual Salary

Cost per Employee

£29.35 per month

£2.52 per month

Although the above premiums provide a rough idea of the cost of a death in service benefit for your employees, to compare quotes from all the leading insurers call us on 02074425880 or email help@drewberry.co.uk.

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Is Death In Service Taxable?

HMRC generally considers death in service cover a business expense for employers. This means premiums are typically eligible for corporation tax relief.

Meanwhile, for employees, it’s not usually a P11D or a benefit in kind. There won’t therefore be any additional income tax for staff to pay on the benefit they receive.

What About Inheritance Tax on the Benefit?

You don’t typically pay inheritance tax on a death in service benefit. This is because a trust must be in place before the policy goes live.

In the event of a claim, the trust distributes the payout, usually to the employee’s next of kin (although it could be to any individual or UK charity the employee nominates).

The payment of a death in service benefit avoids inheritance tax by ensuring it never becomes part of the deceased employee’s estate.

Which Type of Trust Should I Use?

In most cases you’ll need a discretionary trust. However, there are two main options:

An employer-established trust is the more bespoke approach. It gives you as the business the most control. However, you’ll also be responsible for all the administration and staying on top of any changes to trust law.

The insurer’s master trust is less bespoke. This said, it needs much less admin as the insurer takes care of everything. For this reason, many of our clients do use the insurer’s master trust.

For more on the difference between these two types of trust and which might be right for you, click here.

Is It Linked To A Pension Scheme?

Historically, a company pension scheme may have included a level of death in service benefit. However, this was often limited to 1 or 2 years of pension income.

Today, most businesses now choose a separate death in service policy that’s completely independent of the company pension scheme.

Beware the Pension Lifetime Allowance

It’s worth considering that a payout could form part of employees’ pension lifetime allowance. While this isn’t an issue for most people, it might be for high earners with large pension pots.

If an employee exceeds the pension lifetime allowance (currently set at £1,073,100), they’ll need to pay additional tax at 55% on pension income and the death in service benefit.

Who Are The Best UK Group Death In Service Insurance Providers in 2021?

As an independent employee benefits adviser, we work with all the top UK insurers. We’re here to do all the heavy lifting, sourcing you a death in service insurance quote from the best group insurers including:

  • AIG
  • Aviva
  • Canada Life
  • Legal & General
  • MetLife
  • Unum.

Every insurer is different which makes it important to do thorough market research to find the one that best meets the needs of your business.

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Common Employer Life Insurance Questions

  • Is Death In Service The Same As Life Insurance?

    With Life Insurance, it’s paid for personally, from your bank account. For death in service, the cover is paid for by the company.

    You only receive death in service Insurance from your employer for as long as you’re working at the company – if you move jobs, your cover lapses. Individual Life Insurance is owned by you personally and remains in place for the full term unless you stop paying the premiums.

    Your employer typically decides how much cover they will provide, which is usually a multiple of your salary.

    Do I need Personal Life Insurance If I Get Death In Service?

    Your company death in service benefit may not be sufficient to meet your needs, especially if you have a larger mortgage or other commitments you might want to have paid off on your death.

    You’re free to choose how much life cover you want on an individual basis, which is why many people choose to ‘top up’ with Personal Life Insurance.

    Terminal Illness Benefit
    A personal policy will payout immediately should you be diagnosed with a terminal illness and be told you have less than 12 months to live. This is not included on the majority of group policies.

  • Is Death In Service Benefit Included In A Pension?

    Historically a company pension scheme had a level of Life Insurance associated with it however it was often limited to 1 or 2 years worth of income.

    More businesses are now choosing to set-up a separate Life Insurance policy which is completely independent of the company pension scheme. Many firms offer between 2 and 10 times your gross annual salary as a Life Insurance payout should you die whilst in employment.

    Before setting up your own personal cover it is worth checking the amount you would be entitled to from your employer’s scheme.

  • How Long Does It Take To Pay Out?

    Most claims are paid within 60 days of being made aware of the death with some providers paying out a lot quicker. The sooner the insurer is made aware the better.

    When making a claim they are likely to need to know:

    • The name of the deceased
    • The date and cause of death (as stated on the death certificate)
    • The policy number
    • Your name and your relationship to the deceased as well as your contact details.
  • How Long Does Cover Last For?

    Death in Service Insurance lasts until the pre-defined cease age of the policy. This could either be set to an employee’s state pension age (which will vary depending on the worker) or to an age you specify when you take out the cover.

    To comply with pension regulations, which Death in Service Insurance falls under, the maximum cease age for these policies is 75.

    The older you set the cease age, the higher your premiums will be.

    Death in Service Cover also ceases when an employee is no longer in service with your organisation.

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How Does It Fit With Other Employee Benefits?

Given its position as a cheap yet highly-valued employee benefit, a death in service benefit is often one of the first policies a company introduces.

As a cornerstone of any employee benefits package, it can offer a solid foundation to introduce other insurances, such as:

  • Business Health Insurance
    Pays for healthcare in private hospitals, providing your staff with the best care exactly when they need it.
  • Group Critical Illness Cover
    Pays out a tax-free lump sum if an employee is diagnosed with a critical illness such as cancer, heart attack or stroke.
  • Group Income Protection Insurance
    Works with your company’s sick pay policy to offer staff a monthly income if they’re medically unable to work.

Compare Death in Service Insurance Quotes & Get Expert Advice

Setting up and maintaining a competitive Employee Benefits scheme can be a bit of a headache, but our expert regulated advisers take all the heavy lifting off your desk.

We help businesses of all sizes across the UK set-up their benefits making sure they have the best policy for their employees at the most competitive price.

Why Speak to Us?

We started Drewberry™ because we were tired of being treated like a number.

We all deserve a first class service when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

If you need help setting up a company paid death benefit for employees give us a call on 02084327333 or email help@drewberry.co.uk.

The staff have been very knowledgeable and I have enjoyed working with Nadeem on setting up our plan.

Kim S
22/06/2020
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