Navigating the differences between death in service benefit and life insurance

Many employers offer death in service to their staff, and it’s important to understand the simple differences between this benefit and life insurance. 

Life insurance is important for many people. It pays out a lump sum if you die or suffer a critical illness, helping your dependents cope financially. 

Death in service is similar. Yet some people may be unsure if they have death in service, while others may not know if it would be enough for their family to live on. Meanwhile, those who have death in service may not realise they could benefit from taking out life insurance too. 

What does death in service benefit mean? 

Death in service may be offered by companies as part of an employee’s benefits package. It’s paid out as a tax free lump sum if you’re employed by the company (i.e. on the payroll) at the time of your death. 

While death in service may sound similar to life insurance, there are in fact a number of differences. This means that even if you have death in service, you might want to boost your cover with life insurance. Here’s why… 

How death in service benefit actually works?

Some pension arrangements provide lump sum benefits to beneficiaries in the event of a member’s death. The benefits paid out depend on the type of pension arrangement in place and whether or not you have dependents. This example explains how this works:

Example: Linda is a member of a pension scheme. Her salary is €50,000 and she is covered for a lump sum death benefit of three times her salary. If Linda dies, a benefit of €150,000 is payable to her estate or directly to her beneficiaries.

Death in service payouts: How do they differ from life insurance? 

Tax implications  

Death in service benefit is not taxable, but it can vary (though it is typically two to four times your annual salary*). 

Sometimes, death in service benefit is linked to a company’s pension scheme, and you’ll need to be signed up to it to qualify for the benefit. Finding out what you’re entitled to receive is simple – just ask your employer. 

You might think the benefit is a substantial sum of money, but you want to be sure the financial safety net for your family is as wide as it can be. Plus, if you were to die, the costs involved soon add up – especially considering the average cost of a funeral can vary from €2,500 to €8,000**. 

Though a death in service payout is free of tax, bear in mind that tax is based on your personal circumstances and may change in the future. 

The payout of a life insurance policy depends on the cover you’ve chosen to take out – meaning you have the freedom to decide how much your beneficiaries get, not your employer. 

While a life insurance payout is also free of income tax or capital gains tax, bear in mind it could form part of what it called your ‘estate’ – your overall net worth – so may incur inheritance tax. 

Depending on how much your beneficiaries may need if you were no longer around, you may wish to supplement your death in service benefit with a life insurance policy. 

Policy payments for death in service benefit vs life insurance  

One of the main draws of death in service is that there’s no annual or monthly premium to pay – you just need to be employed to benefit from it. You’re required to make regular payments for life insurance, but, of course, your family or named beneficiaries could receive a higher payout in the event of your death. 

You can take your death in service benefit into account when you apply for life insurance, which can bring down the cost of cover because you will need less of it. 

It’s also worth remembering that if you leave the company where death in service is offered, you’ll no longer be covered. 

Who receives payout in death in service or life insurance?  

Death in service: Usually, death in service schemes are set up under a discretionary trust, meaning trustees – i.e. your company – will have the final say as to who receives the money, though you can nominate a beneficiary. This shouldn’t be a problem, but it’s important to check with your employer if this is the case, and make your requirements clear. 

Your employer will also be able to explain how death in service is calculated. 

It’s worth bearing in mind that you’re unable to assign your death in service benefit to cover your mortgage, but your beneficiaries can decide to use the money towards repaying a mortgage. 

Life insurance: With life insurance you have more options on who receives the payout. For example, you could place it in trust and choose your own beneficiaries, you could assign it to your mortgage, or you could simply leave it to form part of your estate. 

Underwriting consideration 

Another key difference between life insurance and death in service is that you usually will not be underwritten for death in service. 

Underwriting is the process by which an insurance company will decide whether or not to offer you a policy, usually by asking you questions about your health and activity. You will go through underwriting when taking out a life insurance policy. 

How to claim for death benefit?

If you wish to submit a claim for death benefit you should first contact the person that set up the policy for you to establish that the benefit applies to your policy. You can either speak to your financial advisor or with one of Zurich’s financial advisors and they will guide you through the steps. You can find out more about claiming for death benefit here.

What now? 

Choosing the right life insurance cover for you and those closest to you is important and will provide many great benefits. Visit our Zurich Life insurance page to find out more or discover the level of protection you need by using one of our handy life insurance calculators.  

Sources: 

* www.moneysupermarket.com/life-insurance/death-in-service/ 

** https://www.fanagans.ie/arranging-a-funeral/funeral-arrangements/funeral-costs

The information contained herein is based on Zurich Life’s understanding of current Revenue practice as of 1st November 2023 and may change in the future.