Death in Service or Individual Term Protection – Which is most appropriate?
Life insurance can be a valuable benefit designed to protect your loved ones in the unfortunate event of your demise. It can ensure large liabilities, such as mortgages, are paid off to reduce living costs to your partner and children and/or it can provide additional funds to support your family to cover a fall in the household income.
Whilst many across the UK take out individual Term protection policies each year, are employees and employers making the most of the alternative Death in Service occupational benefit?
Similarities and differences
The straightforward aim of both a Death in Service and Term Protection policy is for a lump sum amount to be provided to beneficiaries upon the death of the life assured.
This lump sum or ‘sum assured’ is often set by the employer of a Death in Service as a multiple of the employees’ salary however, for Term Protection, a specific amount is chosen by the insured person to either match a liability or provide income support.
Death in Service is deemed an occupational benefit, typically provided and paid for by the employer, whereas individual protection is a personal policy, usually arranged by the insured person.
Premiums for a Death in Service are most often calculated using a Unit Rate that takes into account the entire demographic of the workforce, whilst Term Protection is based solely on the underwriting of the individual.
Individual Term Protection is set for a determined period of time, commonly in line with the length of a mortgage, whereas cover under Death in Service is provided during the individual’s employment or up to a specific age, e.g. State Pension Age.
Benefits of Death in Service
- The cost of the policy is normally covered by the employer, with no cost to the employee.
- The cover can often be cheaper than individual insurance, especially for older employees, due to younger individuals reducing the Unit Rate.
- Employers have the option to allow increased levels of cover, should the employees choose to pay the difference.
- The cost of the cover paid by the employer is a tax exempt benefit for the employee and a tax deductible expense for the employer. In the event of a claim, the lump sum benefit paid is tax-free.
- Your beneficiaries receive a cash sum – for example a £25,000 annual salary could result in up to £100,000 in death in work benefit if the benefit was on a 4x salary basis.
Disadvantages of Death in Service
- From the employee’s perspective if they changes jobs, the cover will cease, and their new employer may not provide this benefit.
- If the amount of cover is based on a multiple of salary, this may or may not be enough to meet the protection needs.
- The employee can only nominate a beneficiary meaning this remains a request rather than a binding obligation so, whilst it would be unlikely for trustees not to pay the benefits as specified, it could occur in some circumstances.
- This covers the employee only, and not partners, unlike joint life insurance. This could leave a protection shortfall unless other arrangements have been made.
Death in Service and Individual Protection?
A Death in Service benefit can certainly be a positive if offered by an employer however, real consideration will need to be made as to whether a multiple of your salary would be enough to support beneficiaries after death. By simply relying on a Death in Service benefit, this may not cover remaining liabilities. For example, if there were an outstanding mortgage of £300,000 and a sum assured of £150,000, then a significant liability could be left to family.
If a Death in Service was not offered or the benefit was ignored, a higher sum assured may be chosen on an Individual Term Protection policy, possibly for the full amount of a mortgage, causing an inflated premium and a policy that does not match protection needs. As stated previously, individual policies are typically more expensive overall, which may cause policies for higher benefits to become unaffordable for some people.
If relying on each of these policies alone, it may prove to be a more ineffective provision of cover in the long-term. By opting to consider the use of both types of policy within protection planning, the same level of cover could be received for less, as the employer will pay for a proportion and the premium for a smaller sum assured would be lower. Alternatively, the Death in Service benefit could be used in addition to the Term Protection cover to provide free income support on top of the mortgage liability being covered.
From an employers’ perspective, the provision of a Death in Service policy is frequently seen as an easy, cheap benefit to provide to employees, particularly compared to the alternatives such as Private Medical Insurance, which can be surprisingly valuable. This can not only ensure your staff remain happy in employment, but can also be seen as part of a benefit package to entice skilled recruitment.
To discuss the appropriateness of a new Death In Service or Individual Term Protection or to review an existing policy please contact our Financial Planning team on +44 (0)1227 768231 or provide your details on our online enquiry form.
The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making any decisions.
Always obtain independent, professional advice for your own particular situation.
Kreston Reeves Financial Planning Limited, Independent Financial Advisers. Authorised and regulated by the Financial Conduct Authority.
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