How do death-in-service benefits work?

What are death-in-service benefits?

A death-in-service benefit provides a payout to any employees who die during their employment with you. This comes from a life insurance policy your company pays for on your employees' behalf.

Many companies offer a death-in-service benefit as part of a broader employee benefits package.

Why it's a good idea to offer death in service as part of your benefits package

When employers provide death-in-service benefits, employees know that the payout their loved ones will receive can support their family financially when they're no longer around. It could cover mortgage payments, outstanding debts or day-to-day living costs.

Offering a death-in-service benefit can also enhance your reputation and make you an employer of choice. It demonstrates a willingness to look after employee welfare, which can improve staff retention.

How do death-in-service benefits work?

You can offer death-in-service cover by choosing a policy with terms and conditions that suit your needs, then pay a premium to cover each employee. If an employee dies whilst employed with you, the policy will pay out a tax-free lump sum to their beneficiaries.

The death doesn't need to be work-related for the death-in-service benefit to pay out, but it will only pay out if the person covered is still an employee.

The death-in-service benefit pays a lump sum to a chosen beneficiary

A death-in-service payout will go to your employee's chosen beneficiary, typically their spouse, partner or another dependent. You can ask a new employee to complete a beneficiary nomination form as part of their onboarding process, so all the paperwork is in order.

The death-in-service benefit amount

The amount that a death-in-service benefit pays depends on the policy you choose. The money paid is usually a multiple of an employee's annual salary, typically between 2-4 times.#

How much does a death-in-service policy cost?

The cost of your death-in-service premiums depends on various factors relating to the risk that a claim will be made against the policy. Some relate to your business and chosen policy, while others vary between employees.

Business and policy factors

• Size of business - the more employees you have, the cheaper the cost per head.
• Type of business - premiums will be higher if your work carries an increased risk of injury or death in service.
• Level of coverage - the amount you want the policy to pay out will influence the cost per head.
• Free cover limit - the coverage your policy offers without providing medical information.
• Additional coverage - a group life insurance policy can also include critical illness coverage, which will cost more.
• The insurance term - typically, an employer offers the death-in-service benefit until an employee retires, so it will be influenced by an employee's age when they join.
• Increasing or level cover - increasing cover tracks inflation, ensuring that the buying power of the death-in-service payment will keep pace with the cost of living.
• Reviewable or guaranteed premiums - guaranteed premiums remain the same during the policy's life and are generally cheaper than reviewable premiums.

Personal factors

• Age - the older your employees, the higher your premiums will be.
• Health - your employee's overall health and whether they smoke will influence premiums. Some death-in-service policies also look at an employee's family medical history.
• Job role - your insurer will examine the risks associated with an employee's role. Some insurers assess risk differently, so it's worth shopping around for a better deal.
• Hobbies - if an employee has any high-risk hobbies, this will increase the cost of your premium.

What types of death-in-service benefits are there?

Death in-service cover can be provided by two types of life insurance policies, which your company can offer together or separately.

Group life insurance policy

A group life insurance policy offers your employees a death-in-service benefit without needing to pay for separate life insurance. They can still take out individual life insurance to provide their loved ones with additional financial protection and pay the annual or monthly premium themselves.

What does group life insurance cover?

A death-in-service benefit pays a lump sum equivalent to a multiple of your employee's annual salary. Some policies will also allow you to claim all or part of the death-in-service payout if an employee becomes terminally ill and has a life expectancy of fewer than 12 months.

You can also add other services, such as well-being support, rewards and discounts and bereavement counselling.

Exclusions

It's essential to check the small print before you take out a policy. Most death-in-service benefit claims are straightforward. However, a claim may be turned down if the death has resulted from one of the following:

• Suicide or self-harm
• Self-inflicted injuries - these can include death resulting from participation in a dangerous sport.
• Drug or alcohol abuse
• Involvement in criminal activity - this only applies to perpetrators and not victims.
• Pre-existing medical conditions - exclusions relating to pre-existing conditions will depend on whether your death in service cover requires medical information. A death-in-service payment will usually only be declined if the death resulted from a condition that should have been declared but wasn't.

What are the tax implications of having a group life insurance policy?

A death-in-service benefit is paid to an employee's beneficiaries as a tax-free lump sum. The payment is made into a trust, so it doesn't form part of their estate for inheritance tax purposes. The premiums also aren't liable for income tax or National Insurance.

A death-in-service scheme can make your business more tax efficient as you can claim corporation tax relief on the premiums. They're also an allowable business expense for limited companies and self-employed sole traders. It's important to check that you meet HMRC's requirements for tax relief.

Relevant life insurance policy

You can opt to deliver your death in service benefit by choosing a relevant life insurance policy that can offer high-earners tax benefits.

What does a relevant life insurance policy cover?

Relevant life cover provides a death in service payment equivalent to a multiple of an employee's annual salary. It can pay out up to fifteen times your yearly total remuneration. This isn't limited to your annual salary, so it can be more suitable for company directors who may receive dividends and a bonus.

Are there any exclusions?

Relevant life policies are only available to current, UK-resident employees of businesses based in the UK. If your employees work abroad, they can still be covered if they fit HMRC's definition of a UK resident. If an employee has resigned or retired, they won't be covered, although you can opt to transfer a relevant life policy to an employee when they change jobs.

If your insurers ask for information about an employee's medical history, job role or hobbies, it's vital to provide all the details and let them know about any changes. One of the most common reasons for a life insurance claim being rejected is because the death resulted from something that hadn't been disclosed.

There are also standard exclusions relating to the cause of death, including:

• Suicide or self-inflicted injury
• Death resulting from an individual's recklessness or negligence
• Drug and alcohol abuse or addiction
• Involvement in crime, terrorist activity or war

What are the tax implications of having relevant life insurance?

One of the main benefits of offering a death-in-service benefit via a relevant life policy is that it allows you to provide more cover to high-earning employees without increasing their tax bill.

Group life policies are registered with HMRC alongside your company pensions. If the total amount available exceeds the pension lifetime allowance (currently £1,073,100), the sums over that level will be taxed at 55%. A relevant life policy doesn't count towards this allowance. Your business can also claim tax relief on premiums; neither you nor your employees need to pay National Insurance on premiums. Find out more about the lifetime allowance here.

Your policy needs to meet a few requirements to qualify for tax relief:

• It can only offer life cover - you can't include critical illness coverage or other types of insurance.
• It's only available to people under 75.
• It can't have a cash surrender value.
• The payout must be made to an individual, charity or trust - paying into a trust means that your employee's loved ones won't have to pay inheritance tax.
• It can't be used for business protection, so the lump sum can't be paid to a limited company.

Getting professional advice

Please get in touch with us to discuss your death-in-service scheme and get a relevant life cover or group life insurance quote.