Why death-in-service benefit is vital for your employees

A death-in-service benefit is a life insurance policy that pays a tax-free lump sum to your employees' loved ones when they die. Your business buys death-in-service cover via a life insurance policy that covers your workforce and pays the monthly or annual premiums. Each employee nominates a beneficiary to receive the lump sum payment when they die.

The death-in-service benefit pays out if an employee dies during their employment with you. Their death doesn't have to be work-related.

As mentioned, death-in-service cover will pay out a lump sum to your employee's chosen beneficiary as long as their employment contract is still in effect at the time of their death. The death-in-service payment is typically a tax-free lump sum equivalent to a multiple of an employee's annual salary. The payment is usually between two and four times the usual annual salary but can be higher in some circumstances.

Your chosen life insurance policy will also have terms and conditions for death-in-service cover and whether the death-in-service benefit will pay out. For example, there may be an upper age limit on the policy. When obtaining quotes for death-in-service cover, it is wise to speak with your employees, particularly if they're nearing state retirement age, to understand their plans and whether you may need to invest in a death-in-service benefit that extends beyond normal retirement age.

Offering a death-in-service benefit as an employee benefit has many advantages for you and your team. Here are just a few of the benefits for your employees.

Financial security for their loved ones

A death-in-service benefit gives your employees peace of mind, knowing their loved ones will be provided for should the worst happen. It offers a financial safety net to ensure your employees' family members can pay their day-to-day living expenses and maintain their quality of life. Your employee can support their family financially when they're no longer around.

Death-in-service cover has a practical benefit but also relieves the stress of worrying about bills at a challenging time.

Can help to pay off the mortgage or other debts

A death-in-service payment can be used in several ways. Your employee's loved ones can invest their lump sum to create a regular income or to plan for the future. For example, if an employee has young children, they may want to put the money towards university fees or their first home.

Alternatively, their family can use the death-in-service benefit to pay off debts and reduce living costs. Mortgage payments can account for a significant part of a family's regular expenses, so using the death-in-service benefit to pay off the mortgage can substantially reduce their living expenses.

It can be paid out quickly

A death-in-service payment typically pays into a trust, meaning it isn't part of your employee's estate. It also means that beneficiaries can receive the money quickly as it isn't subject to probate. The policy can pay out as soon as they claim.

Terminal illness cover

Death-in-service cover often includes a terminal illness payment. An employee can claim part of their death-in-service benefit if they're diagnosed with a condition listed in the policy and doctors consider them to have less than 12 months to live. They can use the money to take a last holiday, pay for care, or adapt their home, making the end of their life more comfortable.

If your employer's benefit package includes health insurance, this may also cover end-of-life care, meaning the terminal illness payment can go further.

Providing a death-in-service benefit to your employees offers them peace of mind and many benefits for your business.

It shows your team you care about employee welfare

By its very definition, a death-in-service benefit provides for your employees when they're no longer around and able to work for you. It shows your employees that you care about their welfare and families and are prepared to invest in ensuring their financial future is secure.

Increases employee engagement and retention

When employers offer death-in-service cover as part of their employee benefits package, it shows that they value their team, which can increase staff loyalty and employee retention. A death-in-service benefit potentially creates a mutually supportive relationship with increased employee engagement, providing your company culture supports this in a broader sense.

Makes you an employer of choice

It's a job seekers' market, with Generation Z employees increasingly willing to leave employers whose values don't align with their own. Including a death-in-service benefit in your employee benefits helps to demonstrate your culture and make you an employer of choice.

There are several ways to provide death-in-service benefits. The most common is via life cover, with the type of policy you choose depending on an employee's circumstances.

Group life insurance

A group policy pays a lump sum to an employee's chosen beneficiary, with the death-in-service payment equating to a multiple of their usual salary.

Most group policies also include terminal illness cover for employees who are diagnosed with an illness listed in the policy and who have less than 12 months to live.

Your business buys the policy and pays the premiums to provide death-in-service cover for all employees.

Relevant life insurance

Relevant life insurance provided businesses with a way to top up an employee's death-in-service cover without incurring tax penalties. Group life cover and pension scheme benefits used to be subject to a lifetime allowance of £1,073,100. Employees would pay tax at 55% on any benefits over that amount.

Relevant life insurance was exempt from the lifetime allowance, meaning employers could use it to offer additional death-in-service benefits. However, the lifetime allowance will no longer apply from 6 April 2024. Relevant life cover may still be worth having in some circumstances. For example, it isn't linked to an employee's annual salary, so it can be useful for company directors or anyone paid via dividends. It's worth speaking to an insurance broker and financial adviser for tailored advice.

A workplace pension scheme

Depending on the type of pension scheme you have, your company's pension scheme can provide a death-in-service benefit. Defined benefit pensions can pay out a lump sum to your employee's beneficiaries. Alternatively, they can continue to pay out a percentage of the monthly payments your employee would have received to dependents, including their spouse or children. However, continuing payments will likely be taxable.

Death-in-service payments depend on the individual rules that apply to your scheme.

You must understand the tax rules for death-in-service payments, as these affect how you make and set up your scheme.

Inheritance tax

Inheritance tax applies to anyone whose assets exceed £325,000, or £500,000 if you own your own home and leave it to your children or grandchildren when you die. A death-in-service lump sum won't be part of your estate if you arrange for the payment to go into a discretionary trust.

Trustees look after the money during an employee's life. When the employee dies, the lump sum is paid into the trust. The trustees then ensure that the lump sum goes to the proper beneficiaries. Setting up a life insurance trust means an employee's beneficiaries can receive the money quickly without waiting for probate.

Income tax and National Insurance

HMRC doesn't treat life insurance as a benefit in kind as they do with health insurance, meaning your employees won't have to pay income tax or National Insurance on the benefit. Providing life cover as an employee benefit can give them tax savings. If they choose to buy an individual life insurance policy, they'll pay for it out of income that's already been taxed.

Lump sum payments are also typically tax-free. However, if an employee's family receives regular payments via a company pension scheme, these payments will likely be taxable. 

Corporation tax

Death-in-service and life insurance premiums are allowable business expenses for corporation tax purposes, so you can claim tax relief on premiums and reduce your bill.

Every insurance policy has exclusions, meaning life insurance policies won't pay out in certain circumstances. Terms and conditions vary depending on the type of life policy you have and your chosen provider. It's essential that you and your employees understand how the policy operates. While insurers rarely reject life insurance claims, an exclusion could mean an employee's loved ones are left without financial support at an already stressful time.

Here are some of the most common exclusions with most policies.

Group life insurance policy

When an employee joins a group life insurance scheme, they may need to provide medical information if your scheme has medical underwriting. Life insurance doesn't usually have medical exclusions like health insurance does. However, one of the most common reasons for a claim being rejected is because the death resulted from a condition that an employee should have disclosed but didn't. Insurers may also request information about employees' roles and hobbies when providing a life insurance quote.

A claim can also be denied if the death in service resulted from:

• Drug or alcohol abuse.
• Suicide or other self-harm.
• Self-inflicted injuries such as participation in a hazardous sport or activity.
• Injuries sustained while committing a crime (victims of crime are still covered).

Relevant life insurance

Exclusions relating to an employee's cause of death are the same for relevant life policies as they are for group policies, including deaths resulting from suicide, self-harm or alcohol abuse.

Relevant life policies also include conditions pertinent to an employee's employment and tax status. Historically, relevant life insurance has been used to help reduce an employee's tax bill, so it's only available to UK residents employed by businesses based in the UK. Employees can work abroad if they're still UK residents for tax purposes.

Although some are transferable, the policy won't pay out if an employee has resigned or retired.

The cost of your annual or monthly premium depends on various factors, including:

• The average age of your employees - older employees mean higher premiums.
• The number of employees you want to cover - more employees typically lowers the cost per head.
• The amount you want the policy to pay out.
• Your industry and whether your work carries an increased risk of death in service.
• Individual job roles and how hazardous they are.
• The policy term - the term reduces the closer an employee is to retirement.
• Policy terms and conditions, including the type of premium and whether payouts track inflation.
• Employees' general health.
• Whether an employee has any dangerous hobbies.

Insurers vary in the way they assess risk, so it's worth speaking to a broker to get several quotes.

Globacare is a regulated insurance broker helping you find the right insurance coverage for your business. Contact us for tailored advice on providing a death-in-service benefit to your team.

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