Should you insure for redundancy?

Unemployment insurance could help soften the blow of losing your job by giving you much-needed income while you search for another.

It is no use if you already know or suspect you will be losing your job, or if you run your own business. It is no use if you are sacked or voluntarily leave your job.

It can often be better to have a full ASU policy, for accident, sickness or redundancy. But even then they may only cover you for six or twelve months. A full income protection policy will cover you for a set number of years, until you retire or get back to work. Income protection policies are very useful for the self-employed or small business director. One problem to watch is that many short-term ASU policies are called income protection plans.

Specialist unemployment policies usually pay out for up to 12 months after you have been made involuntarily redundant. They do not pay out if you have another job lined up, nor if you ‘forgot’ to tell the insurer when you applied that your employer was planning redundancies. The situation on people who apply for voluntary redundancy is a complex one, particularly if it is done as ‘early retirement’. The latter means you get a pension so are technically not unemployed, but retired. The former is an area that can vary by insurer and by policy wording.

There are huge differences in cover between what look like similar policies. Each policy comes with its own list of conditions. Similar policies from rival providers often differ in their list of exclusions: the period before a claim can be made could differ, or the length of time they will continue to make payments.

You can choose from three different types of cover:

• standalone unemployment cover

• as part of a payment protection insurance package

• as an add-on to an income protection plan

Standalone unemployment cover

If the family budget is tight and you do not want illness cover, then standalone unemployment cover can be a good option. The premiums are likely to be lower if you are buying unemployment protection on its own rather than as part of a protection package.

The payout will usually be paid monthly for up to 12 months, after which you are on your own.

As redundancy payments and savings can make the first few weeks easier to bear, then you can delay payment, with the first payment arriving 30, 60 or 180 days after you make a claim. The longer the waiting period, the cheaper your monthly premium will be.

Payment protection insurance

In most cases, unemployment cover is part of a package that also guards against the effects of accident and sickness on your income. Such policies will cover your mortgage repayments and loans. As with standalone cover, most people are eligible to apply – age, gender and health are not important factors.

Policies usually pay one month after your income ceases and payments will continue for a set period, usually 12 months, but some offer 24 months.

This is short-term assistance. In many cases, you will need to have been continuously employed on a permanent contract by the same company for at least a year to qualify under the unemployment element of the policy.

A policy will not pay out in the first three months, or longer, after you sign up.

Mortgage payment protection and short-term income protection are variations.

Income protection

Another way you can purchase unemployment cover is as a bolt-on addition when you buy an income protection policy.

Income protection insurance is designed to replace your income if you are unable to work for more than a specified period because of illness, accident or, in some cases, unemployment. As with standalone cover, there’s usually a deferment period before the payment kicks in – again, the longer you agree to wait, the lower your premiums.

The unemployment section is often limited to 12 months’ payout.

But the income protection sections on accident and illness can pay out for several years, and even until you retire.

Your choice

See our Income Protection section for more details, but basically it comes down to whether you want short-term or long-term protection.

Beware

Some policies can be misleading and expensive as well as failing to pay out when expected. There will be lots of caveats so you really need to read the small print carefully before buying the cover or you might find the policy worthless when it comes to claiming.

Confusion

Although we are clear on the differences between the various types of policy - insurers and others may confuse you. The terms, income protection, mortgage protection, payment protection are used very loosely and rarely clearly show whether a policy is a short-term or long-term one.

I am self-employed

If you are self-employed or run a business it is easy to get cover for accident and sickness. Getting cover for unemployment only is harder.

The terms and conditions of most policies state that, in order to be covered, a self-employed person has to provide proof that they have involuntarily ceased trading and declared this to HM Revenue & Customs. They must be registered as unemployed and actively seeking employment.

The government will protect me

The government is tightening up on whom it pays, for how long and how much. For most people, the state handouts will not in any way cover your mortgage, utility bills, ongoing insurance premiums, and those little things like food, drink and clothes.

Income protection insurance: Hot Topic: 05/02/2009