Is Your DIS (Death in Service) Cover Really Enough If the Worst Happens?
And is it ever worth buying more?
Talking about any sort of insurance, but especially life cover has to be one of the most boring and depressing subjects there is.
It combines one of the dullest ways possible to spend money and it forces you to acknowledge your own mortality. It’s the one product that you personally will never benefit from, although you have to pay for it out of your own money.
It doesn’t exactly sell itself, does it?
This is almost certainly why most of us never really want to spend any time discussing it, weighing up options or doing any more than the absolute bare minimum that we can get away with.
Yet we also know it one of the most selfless and responsible acts we should carry out, especially if we have a family. Fortunately, for the sake of our collective sanity, it’s possible to do a quick double-check and work out whether we have everything we need or if we need to plug a few gaps for those we leave behind.
This article will help you do that and I promise you it will only take a couple of minutes. After this we can both get on with something far more interesting, positive and exciting.
In fact, anything else at all.
Employer D.I.S. cover is great … but not perfect
When we first get the contract for our new job and we see that ‘Death in Service’ clause, we might lazily skim through it with half-hearted curiosity. We’ll certainly spend less time on it than we would with the more interesting stuff such as holidays, pay, stock options or other benefits.
After all, if we end up ever using it, it means something has gone terribly wrong and we won’t know about it anyway.
At best, most of us will probably think to ourselves:
“Well, at least I don’t have to worry about finding life insurance now.”
Even I will admit to doing this early on in my career! Somehow, just seeing it there was enough to put a tick in the box.
The top-line numbers look impressive — some companies pay up to 36 times your basic monthly salary to your family in the unfortunate event of your demise as long as you’re directly employed with them at the time. There’s usually a cap and, although this can be set a high level, such as $2m, it’s worth locating the small print to find out what it is for you.
But behind the top-line numbers there can also be some limitations that are not immediately obvious.
Whilst leaving your existing employer to start a new role would clearly negate any insurance agreement with them, it’s worth remembering that new employers may not be able to offer the same level of coverage. Worse, if you’ve you’ve had any health issues since starting your previous position, you may find that the new employer may not be able to cover you at all to any meaningful degree.
In addition, Death In Service employee coverage can sometimes be labeled as ‘discretionary’, meaning it’s possible that either there’s no guarantee that an employer will payout on it at all or, alternatively, it has the power to decide where the money actually goes via a Discretionary Trust.
Finally, company DIS schemes are sometimes linked to the company’s pension scheme. This means you will only receive the associated pay-out if you are signed up to the pension scheme in question.
Whilst there’s no question that having DIS in your contract is a great asset to have, it should be treated as no more than an extra safety net that may come in to effect if the worst happens. To make sure you have peace of mind, the only way is traditional life insurance.
And whilst that may sound like I’ve just taken that previously ticked off an item and put it back on the ‘jobs-I-really-can’t-deal-with-right-now’ list in your mind, I can assure you that it’s easier than you think, cheaper than you believe and more versatile than you can imagine.
And I can prove it.
The misconceptions of life insurance
I can tell you from experience that the main misconceptions about life insurance are that it is very expensive, it has a low payout rate and it’s not very practical for certain people.
The reality is that most good policies that you can take anywhere, regardless of where you’re employed or where you’re living, can be bought at less than the cost of a decent coffee a day.
And, assuming you’ve been following the rules — such as disclosing everything when starting it, not insisting you’re a non-smoker when you’re actually choking down two packs a day and so on — it’ll pay out exactly as it is supposed to when the time comes.
Finally, modern life insurance is actually incredibly versatile and polices are rarely one-size-fits-all. Even our smoker can get full life coverage — it might just cost a little more than that coffee.
So, just how do you work out how much coverage you actually need?
This is another curious phenomenon unique to life insurance — that we tend to underestimate what we need whilst, as we’ve already seen, overestimating the cost.
There are several guidelines that advisers use when assessing a client’s — or even our own — situation. Yes, advisers themselves are some of the best customers for life insurance companies because they understand the importance of having it as well as the peace of mind and value for money it brings.
Whoever is ultimately the client, we’ll usually look at the following factors:
If you have kids, it’s best to start here.
You’ll need to work out the cost of living until they reach their own financial independence, usually classed as 21. If they’re looking at going to university, then these costs will need to be added also. It’s worth remembering that in some countries, such as Singapore for example, kids tend to grow up internationally-minded and study abroad. This can add up to a third more in expenses.
Second, if you have any debts, these should be cleared for the benefit of your surviving family who may otherwise find themselves liable for them at a particularly difficult time.
Finally, you’ll need to make sure there is enough set aside so that the surviving parent can still save and be fully prepared for retirement. This is often underestimated because there is an assumption that the remaining parent can go to work and support the family.
This may indeed be true, but in practice there can be some unexpected issues, such as not being able to work full time when supporting children, not being able to maintain the same level of income and all at a time when there is a terrible sense of loss.
Whilst it all sounds terribly complicated and hard work, the reality is that any good adviser will have a simple checklist system and go through each step with you. With your help, they’ll work out a level of cover that balances your budget with what you actually need.
And, of course, you’ll have the final say on what that might be.
The small print
Because there are so many different types of policy and so many different approaches in different countries, it’s part of your adviser’s job to make sure you’re aware of them.
For example, in the UK, it’s usual to put any life insurance cover into a trust as the government may take up to 40% in the form of inheritance tax.
Many mortgages or similar financial products come with an ‘associated’ life policy which is offered when you take them out. Whilst you’re not obliged to accept them in these cases, they are often offered in such a way that implies they should be taken at the same time.
However, it pays to be cautious with these sorts of bundled offers as the small print sometimes holds a disproportionate amount of benefit for the company making the offer. For example, it may be limited to the product it is offered with or comparatively more expensive for the overall cover you’ll get.
Similarly, it can be tempting to take out life policies that are built into investment vehicles that leave a residual cash or investment value at the end of the term. Whilst it may sound appealing on the face of it, it’s normally much cheaper and more flexible to keep your life insurance and investments separate.
The simple truth is that these types of plans often have opaque charging structures and are created more to provide the company with a high commission than to provide you with a useful solution, so it’s worth researching thoroughly first.
Of course, if you already have your own cover, you may not need theirs anyway.
And … relax
There isn’t a financial adviser in the world who will try and tell you that organizing life cover is a fun-filled, joyful experience that will leave you wanting more, myself included.
The funny thing is, actually getting it set up is oddly satisfying. It’s one of those tasks that’s once it’s done, it stays done, consistently providing peace of mind and securing your family’s future in the background for what often appears to be an impossibly small sum of money.
So, whatever your financial situation and whatever your plans for the future, this is the one thing I always recommend to everyone.
Even if you have got that Death in Service clause in your work contract.
Disclaimer: This article is intended for general circulation and information purposes only. It may not be published, circulated, reproduced or distributed in whole or part to any other person without the prior consent of AAM. This article should not be construed as an offer, solicitation of an offer, a recommendation or provision of financial advice. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser before making any decisions. Whilst we have taken all reasonable care to ensure that the information contained in this article is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this article is subject to change without notice.
