Our new series, An Eye On, continues with a look at how Death in Service (DIS), benefits can help those you leave behind. Paul King explains all.
WHAT will happen to your pension benefits when you die is not the most endearing of subjects. Yet it is hugely important to factor in such details because you never know when tragedy might strike. If you have a family, the very idea of not being there to see a child grow up or grow old with a loved one can be far too grim to even contemplate. But with love comes responsibility and acting now to ensure there is financial help in the aftermath of such an unforeseen event can provide considerable respite for those you leave behind.
One benefit that provides cover for this eventuality is called of Death in Service (DIS), insurance. Few consider the benefits of such a policy until one of the family’s earners has passed. In long established businesses, where DIS insurance is in place, there is often little appreciation of it until there is a claim. There are many unforeseen events that occur in work places which for the unfortunate few would cause a great deal of stress and worry for those left behind if it not were these benefits put in place by employers. In this article, we explore group DIS from the perspective of employers.
Why provide DIS to employees?
The benefit is typically provided by way of an insurance policy taken out by the employer to cover all of their employees. As is fundamental with insurance, the contributions of many provides for the losses of a few and the cost is relatively low when compared to other benefits. Preparing for the worst case scenario – the death of an employee – is beneficial to those belonging to that person and also provides comfort to colleagues who see the resultant benefit.
How does it work?
In order for the benefits ensuing to avail of the optimal tax treatment, DIS benefits are provided either through the employer’s occupational pension scheme or under a separate trust established for that specific purpose.
The DIS insurance policy can provide one of the following:
- A lump sum on death in service (typically a multiple of salary);
- A dependents’ pension which falls under two categories – described, such as 25% of salary or non-described.
- Described pensions are expensive at the moment due to the currently low interest rates that are used to price annuities (pensions for life) that underpin the benefits.
- Non-described dependents benefits provide an amount of money (typically a multiple of salary) from which a dependents pension is purchased (what this amount of money will by is not known due to the variable prices of annuities);
- Both a lump sum and a dependents pension.
Death in Service benefit could be six or eight times a salary, of which a certain amount can be paid tax free. Four times final remuneration (plus a refund of the member pension contributions) is the maximum benefit payable tax free and any amount of benefit above that (2 or 4 times salary) must be used to provide relevant benefits to beneficiaries i.e. purchase a dependents pension.
In the event of a claim the insurance company pays the Trustees, who in turn pay the benefit to the prescribed party under the rules of the scheme. The Trustees tend to have a level of discretion over who the benefits can be paid to as described by the rules of the Trust, but are generally guided in this by an expression of wishes form if one has previously been completed by the member.
The beneficiaries can be financial dependents or others, including spouses, partners and children (up to the age of 18 or in full time education perhaps to a maximum age of 23 years) and it all depends on the rules of the scheme. Some Trusts are worded in a fashion that a legal spouse is only entitled to a survivors’ pension. Thankfully nowadays, Trust Deeds can be flexible to cover many possible complicated family situations.
From a practical point of view, the Trustees can pay the legal representative of the deceased person (i.e. the executor of their estate) or if there has been a nomination form or Letter of Wishes completed the Trustees can alternatively consider making disbursements directly to the names on the form although they are not legally obliged to do this. If situations are very complicated it is often advisable for Trustees to take legal advice to support and guide them in their decision making.
Additional life cover can also be established under an AVC policy (Additional Voluntary Contributions). However, such transactions can be difficult for Trustees to maintain in terms of governance and life companies are not issuing many new policies of this type, so they are therefore slowly fizzling out.
How a group DIS works:
A key benefit of a group policy from a company administration point of view is that there in generally very little underwriting required to establish the policy. The insurance company looks at the group in its entirety and provides a non-medical limit, which is frequently know as free cover (i.e. is automatically given to any member of the group under the policy). Any member of the scheme whose benefits exceed the non-medical limit are underwritten (following completion of a medical questionnaire) for the amount of benefit that exceeds the non-medical limit. This usually effects the employees with the higher salaries. If these members have existing medical conditions or a poor medical history the cover can be loaded (i.e. additional premium charged) or refused.
For smaller groups (e.g. <20 persons) the insurance company will price the DIS cover on the basis of the individual data in respect of the group, i.e. age, gender, civil status (applicable if there are dependents’ benefits being offered) and the level of cover required. They typically charge a recurring single premium for each individual and the sum of the individual prices is the cost of the insurance.
For larger groups of people, an average premium is calculated based on the total level of cover that is required and is expressed by the insurer as unit cost per €1,000 of benefit. This unit rate is then fixed for a period, usually around three years.
Other factors relating to the operation of group DIS policies include: renewals; transferring benefits from one insurer to another; documentation; occupational loading; continuation options; and multinational pooling, but we do not intend to go into these here.
In conclusion:
DIS benefits are a relatively low cost benefit to provide to employees and are often provided by employers as a matter of course. In fact, as the benefit is sometimes provided within the pension scheme, it is often overlooked by employers and employees. People’s mortality is not a comfortable subject to broach with employees but a company with a DIS policy would do well to keep employees informed of this valuable benefit that is being provided, and how it can help them in the long term.
Paul King is Acuvest’s Business Development and Client Manager. Contact Paul at paulk@acuvest.ie or follow him on Twitter @kingofpensions.
Acuvest is an independent pensions and advisory management business taking care of the futures of over 40,000 of our clients’ employees. For more market analysis and expertise follow Acuvest’s daily updates on Twitter @AcuvestIreland and LinkedIn and our fortnightly blogs.