Life insurance and pension schemes

Many employers will offer their workers access to life insurance while they’re employed with them. Usually, this would be set up separately to your pension. However, some older workplace pension schemes were set up to include life insurance. Read this guide to find out more about the differences.

What is life insurance?

If you have a workplace pension that includes life insurance, the life insurance pays out either a lump sum or regular payments on your death, giving your dependants financial support after you’ve gone.

The amount of money paid out depends on the level of cover you buy.

You decide how it’s paid out and whether it will cover specific payments – such as mortgage or rent – or if it’s to leave your family with an inheritance.

This might be provided by the pension scheme or through an insurance policy purchased by the employer, or both.

The amount of life insurance paid out depends on a number of factors, including:

  •  the type of pension scheme you belong to
  •  whether you're an active member of the scheme (still contributing to it or working for the same employer)
  • whether you've reached the selected retirement age or started taking your retirement benefits.

So it’s important to check and understand what applies to you and when this might change.

Defined benefit pension schemes

If you're an active member of a defined benefit pension scheme that includes life insurance, the amount of money that would be paid on your death is often a multiple of your pensionable salary or your earnings at the time of your death.

For example, your insurance could be two or four times your pensionable salary. This is paid as a lump sum and is usually tax-free if the member died before their 75th birthday.

The scheme might pay out other death benefits, such as a refund of any contributions that you’ve paid or a dependant’s pension.

In both cases, it’s important to look at the information you’ve been given by the scheme to find out how much your dependants would receive if you die. If you don't have this information, you can ask your pension provider or scheme administrator

Defined contribution schemes

If you’re a member of a defined contribution pension scheme, the pension pot you’ve built up can usually be paid to your beneficiaries

If you’re an active member of a scheme that provides life insurance, a further lump sum is normally paid if you die.

This amount is often expressed as a multiple of your pensionable earnings or salary at the time of your death.

Again, look at the information you've been given by the scheme to find out how much your dependants would get if you die. If you don't have this information, you can ask your pension provider or scheme administrator.

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Whatever your circumstances or plans, move forward with MoneyHelper.

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