Life insurance pays out a lump sum if you die or suffer a critical illness (depending on the type of cover you hold), helping your dependents to cope financially.
Death in service is similar. 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. Your employer will be able to explain how this benefit is calculated.
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. Also, those who have this benefit may not realise they could gain from taking out life insurance too.
Death in service benefit is not taxable, but it can vary (though it is typically two to four times your annual salary). It can be linked to a company’s pension scheme, and you’ll need to be signed up to it to qualify for the benefit. Be mindful that tax is based on your personal circumstances and may change in the future.
The pay-out of a life insurance policy depends on the cover you have – meaning you have the freedom to decide how much your beneficiaries get, not your employer. While a life insurance pay-out is also free of income tax or capital gains tax, bear in mind it could form part of your ‘estate’ – your overall net worth – so may incur inheritance tax.
With death in service 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 your family or named beneficiaries could receive a higher pay-out in the event of your death.
It’s also worth remembering that if you leave the company where death in service is offered, you’ll no longer be covered. You are 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.
Most people who are not members of a death in service company plan can take out their own policy. The reason you might do this is because you can get tax relief (like your pension) on the premium cost of the life cover. So, if for example, the cost of your cover was €100 per month and you were on the higher rate of tax you may receive up to €40 a month tax credit.