‘Death in service’ confusion can leave bereaved financially vulnerable
Misconceptions about ‘death in service’ benefits mean employees aren’t aware of how much money will be left to their families if the worst were to happen.
The benefit is paid to nominated members in the event of death, as long as the employee who passed away was under contract and qualifies for the payment. As an example, if an employee were to die from cancer, the nominee would receive the benefit.
But 43% of Brits believe this benefit will only be paid out if they were to die in a workplace related incident.
However, not all employers offer the benefit and of those that do, the terms differ.
According to research by Direct Line Life Insurance, 89% of employers offer a death in service benefit.
The average employer offers between one and two years’ salary for employees as part of the benefit terms. This is estimated to be between £27,600 and £55,200. But 5% pay less than a year’s wages.
On the flip side, 18% pay out three to four times an individual’s salary while 5% pay more than five times the person’s annual salary. Seniority within an organisation is also likely to impact the payment.
But the survey of UK HR directors found that 17% of Brits don’t know what death in service is and 11% don’t know if they would be covered by their employer. A further 42% don’t know how much would be paid out to loved ones in the event of them passing away.
Despite the average pay out covering between one and two years’ salary, Direct Line warns that funds used to cover mortgage payments would still leave the average Brit with a shortfall of £67,678.
And, there can also be a time lag for families receiving the money with 14% of firms saying funds would be released up to three months or more after death. The majority pay out within a couple of weeks although 21% said they would pay out immediately.
However, a third of employers don’t automatically pay death in service to a nominee. Instead the money is paid into a discretionary trust which means the company decides who stands to benefit.
Prepare for your financial future
Jane Morgan, business manager at Direct Line Life Insurance, said while death in service is an invaluable employee benefit for many families if the worst were to happen, the amount paid out is unlikely to cover their outstanding mortgage balance.
“This could leave families in a financially vulnerable position, especially having lost an income, adding extra pressure at an already emotional and difficult time,” she said.
“A further 18% believe death in service is a direct replacement for life insurance, despite coverage levels typically being far lower and people not being covered if they are between job roles. Despite this, more than one in ten Brits mistakenly believe this is the case.
“Life insurance isn’t something anyone wants to think about. It’s easy to say ‘I’ll think about that later’ or put it off for a rainy day, but it’s important to be prepared for your financial future, no matter what life may bring. Although it can appear intimidating, it’s important to plan for your financial future, it’s not as boggling or as expensive as you might think.”
Related: See YourMoney.com’s The protection products you need (in order of importance) for more information.