Death in service benefit or your own life insurance

Death in service cover and your own life insurance are not the same thing, and they are not interchangeable. Death in service is a workplace benefit, sometimes called group life cover, that pays a lump sum to your loved ones if you die while still employed¹. It is tied to the job: if you leave, you lose it². Your own policy is a contract you hold personally, and it pays out only if you die during its term³.

The practical difference is control. With death in service you have very little say over the cover level, and the cover ends the moment you stop working for that employer³. With your own policy you choose the amount, the term and whether it is level or decreasing, and it stays with you through job changes. Many people hold both, and that is perfectly legal and fairly common⁴.

Cost is the other difference. Death in service is normally paid for by the employer as part of the benefits package. A personal policy is paid for by you, and prices vary widely with age, health and lifestyle. One provider's own guidance puts life insurance from around £5 a month², while independent research on over 50s plans found premiums of £10 to £30 a month, with a starting payout of just £2,780 for the lower premiums⁵.

Death in service and your own life insurance: what each one is for

Death in service is a lump sum paid by an employer's scheme if you die while employed. It is sometimes called a death in service benefit or group life cover¹. Some workplace pensions come with this type of life insurance built in, paying a lump sum to your loved ones if you die while still employed⁸. Eligibility turns on being employed at the time of death¹.

The money is usually paid to one or more nominated people rather than through your estate, and death in service benefits and pension lump sum benefits often sit outside the estate for that reason¹. That matters because it can reach your family without waiting for probate, and it does not count towards the value of everything you leave behind.

Your own life insurance is different in kind. It is a policy you take out and pay for, and it covers both natural causes and accidental death in most cases⁹. Most insurers cover death from natural causes, accidental death, murder and suicide, subject to a contestable period, though the terms vary by provider¹⁰.

The two also differ in how much you control. With death in service there is very little control over individual cover levels, and cover ends when you stop working for the employer³. With your own policy you set the sum insured and the term. Death in service benefits are also often lower than what a personal policy would provide⁴, which is why the two are frequently held side by side rather than one instead of the other.

Your own policy pays out only if you die during its term

Term insurance covers you for a fixed number of years. You pay premiums until the end of the term, and a payout is made only if you die within it³. Individual policies only pay out if the holder dies within the term, and if you survive past that term your family or dependants receive nothing¹¹. There is no lump sum payable at the end of the term³.

That is the central trade-off of term cover: it is designed to protect a period of life when people depend on your income or when a debt is outstanding, not to build a pot. Fixed-premium term policies keep costs stable but only pay out if you die within the term¹².

There are variations on the structure. A joint life policy pays out on the first death under a first-to-die arrangement, while a second-to-die or survivorship policy pays out after both policyholders have died¹¹. Dual life insurance, sometimes called joint life second death insurance, pays out only if and when the second person dies during the term, and is usually used to cover a large inheritance tax bill¹¹.

A joint policy has one clear drawback: you get only the single payment per policy, even if both policyholders die during the term¹¹. Two separate single policies would pay twice in that situation, which is why some couples hold cover individually rather than jointly.

What your own life insurance costs: from around £5 a month

Prices depend heavily on who you are and what you are covering. One provider's own guidance puts life insurance from around £5 a month², and another states cover from as little as £5 per month depending on the protection chosen³. A third gives £100,000 of level cover from £7.54 a month for a 31-year-old non-smoker in good health on a 21-year term².

At the other end of the market, over 50s plans are a different product with a different price shape. Independent research found premiums of £10 to £30 a month, but with a starting payout of just £2,780 for the lower premiums⁵. That is a guaranteed-acceptance product, not a term policy, and the payout is typically much smaller for the money.

Accidental death insurance is cheaper again because it covers far less. Independent research found single person monthly premiums of less than 0.01% of the sum insured, so £20,000 of cover costs less than £2 a month and £100,000 costs less than £10 a month¹³. It pays out only on accidental death, not on illness.

For a sense of the top of the range, independent research quoted a 50-year-old £103.69 a month for £300,000 of life insurance plus £75,000 of critical illness cover over 20 years⁶. That combines two products, so it is not comparable with a plain term policy.

The cost of dying itself is a useful benchmark. One provider puts the average cost of dying at £9,797¹⁴. A payout is not required to be spent on a funeral, but it can be used that way¹.

Level or decreasing cover: matching the payout to what you owe

Level term means the amount paid out stays the same throughout the policy term, providing an agreed lump sum on death¹². Level term policies pay out the same amount if you die at any point during the term, and premiums are constant, which makes them more expensive than decreasing term cover¹³.

Decreasing term means the amount paid out falls over the life of the policy, usually to match a decreasing debt such as a repayment mortgage¹². The cover amount normally goes down in line with your mortgage as you pay it off¹⁶. One insurer describes its decreasing cover as a cash sum that decreases roughly in the same way a repayment mortgage decreases¹⁷.

Because the payout falls over time, monthly premiums are lower than the same policy with level or increasing cover¹⁵. That is the whole point of the design: the cover tracks the debt, so you are not paying for a payout larger than what is outstanding.

The choice usually follows the debt. A repayment mortgage suits decreasing cover, because the balance falls as you pay it down¹⁸. An interest-only mortgage, or a need to leave a fixed sum to a family, points towards level cover, because the amount owed does not reduce. Where the aim is to replace income rather than clear a debt, the sum insured is set by what the household would need rather than by a mortgage balance.

Health, smoking and age: how they affect getting cover

Standard life insurance is priced on your age, your health and your lifestyle, including smoking, drinking and dangerous activities⁵. Any significant pre-existing medical condition that increases the risk of dying early will also increase premiums¹⁸. Insurers most often underwrite on your personal circumstances, and premiums are affected by age, health and lifestyle¹³.

Smoking and vaping are treated seriously. You must tell your life insurer if you smoke or vape using nicotine products, even if only occasionally¹⁹. Insurers weight premiums for people who use vapes, gum and patches the same as for those who smoke cigarettes¹⁹. If you lie about your smoking and get a cheaper premium as a result, you will have committed fraud, and the policy may be declared void and any payout refused when your family claims¹⁹.

Quitting helps only on a timetable set by the insurer. Some insurers require you to have quit for a year, others for two, five or even 10 years, to be treated as a non-smoker¹⁹. A few insurers let you sign a declaration that you have given up smoking and will reduce your premiums, but most will not discount an existing policy¹⁹.

Health conditions are handled case by case. People with Type 2 diabetes, particularly if well controlled, will often be able to get cover, typically with higher premiums and sometimes exclusions¹⁹. People who have recovered from cancer may be asked for detailed medical information and to attend a medical examination, with higher premiums and restrictions on the maximum sum insured¹⁹. Insurers cannot cover certainties, so they are legally entitled to refuse cover where the prognosis is that you will die during the policy term¹⁹.

Once a policy is in place, the position is more settled. Premiums cannot be increased after a cancer diagnosis, and the policy cannot be cancelled as long as you made full and honest disclosures and keep paying¹⁹. If you already have life insurance and are later diagnosed with diabetes, you do not have to tell your insurer or pay higher premiums¹⁹.

Where life insurance does not pay out

Life insurance usually pays out only when you die, so a diagnosis on its own does not trigger a payment¹⁹. There are also named exclusions. These include non-death events, suicide within the first two years, illegal or criminal activities, dangerous activities, death outside the coverage area, a policy lapse through non-payment, and misrepresentation or fraud¹³.

Suicide is treated with a time limit rather than a blanket bar. Death by suicide within the first two years of the policy is among the named exclusions from life insurance cover¹³.

Terminal illness benefit is the main exception to the death-only rule. Many life insurance policies include it, allowing the policy to pay out early if a doctor says you have less than 12 months to live¹². It is not in every policy, and it is not always available in the last 12 to 18 months of the policy²⁰. Some joint policies include a terminal illness clause allowing a payout if one policyholder is diagnosed with a terminal illness and given less than 12 months to live¹¹.

Missing a payment is the other common way cover ends. If you miss a payment, the policy will usually end, leaving you without cover²¹. It can usually be restarted if you act within 13 months, with the missed premiums caught up and likely a new medical underwriting assessment²¹. If it is not paid, the policy lapses and cover ends²².

Writing a policy in trust so your family is paid sooner

If your life insurance is not written in trust, the payout will usually be treated as part of your estate when you die²³. That can mean inheritance tax is charged on it, and it can mean your family waits for probate before the money is released. Inheritance tax is charged on an estate valued above £325,000⁶.

Writing the policy in trust changes both of those things. It ensures the payout is not added to the value of your estate and subject to inheritance tax, and it may grant access to the funds faster¹¹. The payout is not included in your estate and can be used to settle a bill quickly without waiting for probate²⁴.

Setting it up is usually straightforward. You can write a life insurance policy in trust when you first buy it, most insurers offer this during the application, and there is normally no extra charge²³. A policy can also be put into trust at any time, whether when first written or at a later date²⁵.

There is a limit to what a trust does. Writing life insurance in trust can help make sure the payout goes to the right people, but it does not deal with everything else you leave behind, so a will is still needed²³. Placing assets into a trust is treated in the same way as making a gift for inheritance tax purposes, so the assets could be subject to inheritance tax if you die within seven years, but fall out of your estate if you live longer²⁶.

Pensions and death benefits from April 2027

The tax treatment of pension money on death is changing, and the change does not apply to death in service in the same way. Unused pension funds and death benefits are brought into the scope of inheritance tax from 6 April 2027⁷. For deaths occurring on or after 6 April 2027, pensions will be treated in the same way as other assets, such as property²².

Death in service benefits are carved out. All death in service benefits payable from a registered pension scheme will be excluded from the value of an individual's estate for inheritance tax purposes from 6 April 2027⁹. From that date, all death in service benefits payable from registered pension schemes will be out of scope of inheritance tax, regardless of whether the scheme is discretionary or non-discretionary¹⁰.

There is one group for whom the change is a relief rather than a restriction. Death in service benefits paid by non-discretionary pension schemes, such as the NHS and other public sector schemes, are currently in scope of inheritance tax and will be brought out of scope from 6 April 2027¹⁰.

Where inheritance tax is due on a pension, it will be applied to the pension first, and beneficiaries will then be eligible for a statutory deduction, meaning they pay income tax only on the remaining amount after inheritance tax has been settled¹⁸. Payments to a spouse or civil partner after death, known as a dependants' scheme pension, will not be subject to inheritance tax even after the April 2027 change¹⁸.

Who provides cover in the UK

Death in service cover is provided through employers, either as a standalone group scheme or as part of a workplace pension. Some workplace pensions come with this type of life insurance built in⁸. Eligibility depends on being employed at the time of death¹, and the cover ends when you leave the job².

Personal life insurance is sold by insurers directly, through banks and building societies, and through advisers and brokers. Some providers are known for particular routes: Post Office and Sainsbury's Bank sell cover under their own brands², while Cavendish Online and The Nottingham operate through advice and intermediary channels³. Legal & General and Aviva are among the larger insurers in the market¹⁷.

The market also includes mutual and friendly society providers, and specialist routes for people with health conditions. There are specialist, non-medically screened policies that offer guaranteed cover for anyone, though these are often more expensive, with limited term length or total sum insured¹⁹. People with diabetes can buy most forms of life insurance, with level term and decreasing term the two main types¹⁹.

Where a policy is arranged through an adviser, the adviser's role is to match the cover to the need, not to sell a particular product. Buying protection insurance can be done directly or through an adviser or broker, and the route affects both the cost and the support available if a claim is made.

What protects you, and where that protection stops

Life insurance payouts are not subject to income tax or capital gains tax²⁵. That protection stops at inheritance tax: a payout can be added to the value of your estate and become subject to inheritance tax unless the policy is written in trust⁵. Inheritance tax is charged on an estate valued above £325,000⁶.

There is no law requiring you to have life insurance to get a mortgage, though some lenders say you must have it to borrow from them²⁸. Where a lender required life insurance, the payout may clear the full amount of the loan; without insurance, or for second mortgages not covered, the property may have to be sold²⁹. Buildings insurance is a different matter: it is not a legal requirement, but a mortgage lender might make it a condition of the loan³⁰.

If a complaint about a protection policy cannot be resolved with the firm, the Financial Ombudsman Service can look at it. The ombudsman handles complaints about savings endowments and similar investment-backed policies³¹. Free, impartial help on money questions, including protection and debt, is available from MoneyHelper, and debt advice charities can help where a payout or a debt is causing difficulty.