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The difference between a death in service policy and life insurance

If you’ve got a death in service benefit through your employer, you may be wondering: why would I need life insurance as well? To answer that, you need to know a few details about the differences between the two.

People sometimes refer to a death in service benefit as ‘death insurance’, or a ‘death policy’. It’s a sum of money that’s paid out if you pass away. That’s what makes it similar to life insurance, but there are several things that make it different.

What is a death in service benefit?

First, it’s called a benefit because it’s part of an employer’s benefit package. That means you don’t usually need to pay for it, but if you were to leave your job for any reason, you’d lose the benefit.

And that’s not necessarily the only string attached to this particular benefit: some employers also require you to be a member of the company pension scheme to qualify.

The employer also decides the value of the lump sum payout, which typically varies between 2 and 8 times your annual salary – and you may not have as much control over who the beneficiary of the policy is, or be able to assign it to pay off a mortgage or other debt directly, which you can generally do with a life insurance policy.

However, unlike a life insurance policy, a death in service benefit isn’t underwritten – meaning that an insurer won’t ask you questions about your health or lifestyle to determine whether they would offer you cover and how much you’d need to pay.

Life insurance policies are underwritten, so how much you pay for the cover can depend on your health – which also means how much cover you have may depend on the premiums you can afford. The cost of life insurance also goes up each year as you get older.

Why would I want additional life insurance cover?

As your employer determines the value of your death policy, you may want to think about whether that would be enough to support your loved ones should anything happen to you.

Consider your financial commitments – would the lump sum be enough to cover any debts and maintain your family’s lifestyle? With life insurance, you could also assign the policy to someone else or place the policy into a trust.

You can also buy life insurance anytime, and keep it whether you’re working or not. If you were to leave your job for any reason, including changing jobs or retiring, you wouldn’t have the protection of your death in service benefit in place.

And while you could take out life insurance after leaving a job, remember that premiums rise with age, so the earlier you take out and maintain a policy by continuing to pay premiums, the more cost-effective your life cover is likely to be.

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