Millions of workers may have life cover provided through their employer, often as part of a workplace pension or wider employee benefits package. Known as 'death in service' cover, the benefit typically pays a tax-free lump sum if an employee dies while working for the company. However, the amount is commonly calculated as a multiple of salary rather than being based on someone's mortgage, debts or the amount their family would need.
New analysis from Post Office Life Insurance suggests this could potentially leave some households with a substantial financial gap. Based on an average annual salary of £38,100, cover worth between two and four times salary could provide a payout of between £76,200 and £152,400. Compared with an average new UK mortgage of £225,672, this potentially leaves a gap of almost £150,000 at the lower end of the workplace cover range. The calculation does not include other costs a family may need to meet following the loss of an income, including household bills, childcare, debts and funeral expenses.
Check your death-in-service cover
Death-in-service insurance can be a valuable workplace benefit because employers generally provide it at no direct cost to employees. Workers may have come across details of the cover when joining their workplace pension or selecting employee benefits. However, having death-in-service cover does not necessarily mean a mortgage or all of a family's future financial needs would be covered.
Unlike an individual life insurance policy where someone may choose a particular level of cover, workplace schemes typically base the payout on salary. For example, someone earning £30,000 with death-in-service cover worth four times their salary could receive £120,000 of cover. Workers should therefore check both the multiple of salary offered by their employer and which definition of salary the scheme uses when calculating the benefit.
Who may not be covered?
Eligibility for workplace life insurance depends on the rules of an employer's particular scheme. Post Office Life Insurance warns that some contractors, freelancers, people on zero-hours contracts and part-time workers may not be included. New employees or those on fixed-term contracts may also need to complete a probationary period before becoming eligible under some schemes.
Another important limitation is that death-in-service cover is linked to employment. This means someone who leaves their employer could lose the protection, even if they move immediately into another job where the benefits package is different. Workers changing jobs should therefore check what happens to their existing cover and what protection their new employer provides.
When you may need more life cover
The amount of protection a household needs will vary considerably depending on individual circumstances. Someone with no mortgage or financial dependents may have very different requirements from a parent with young children and a large outstanding home loan. People reviewing their cover may want to consider: the amount outstanding on their mortgage, other loans and debts, whether a partner or children rely on their income, childcare costs, regular household bills, funeral expenses, and how long their family might need financial support.
Paul Paddock, CEO of Post Office Insurance, said: "Workplace life insurance is a valuable benefit, but it's not always enough. With the average mortgage now exceeding many workplace policy payouts, families could face financial strain during an already emotional time." He added: "Standard life insurance can help 'top up' your workplace cover, giving you peace of mind without overpaying. We encourage people to review their workplace policy regularly and consider whether additional protection is needed to cover mortgages, dependants, and other financial commitments."
How to check your workplace life insurance
Employees unsure whether they have death-in-service cover can start by checking their workplace benefits information, pension documentation or asking their employer's HR department. The key details to establish are whether you are covered, how much would be paid, who would receive the money and what happens to the cover if you leave your job. Anyone relying on the benefit as their main life insurance should then compare the potential payout with the financial commitments their household would face without their income.
