The Post Office’s Lifestyle Protection policy pays an agreed monthly sum for up to one year in case of accident, sickness or in certain cases of unemployment.
Consumers are facing a hike in the cost of payment protection insurance (PPI) due to soaring unemployment.
The Post Office has repriced its PPI product and reduced the level of coverage it offers, and other insurers are expected to follow suit as increasing numbers of people claim on the insurance.
The changes to the Post Office product will affect existing as well as new customers, as insurers are allowed to change the terms of the policies as long as they give consumers 30 days notice.
The maximum amount of cover people can have under the group's lifestyle protection product will fall from £2,500 a month if they are unable to work due to an accident or illness or if they lose their job, to £1,500.
People will also have to wait for 90 days after they have stopped working before they receive any money, compared with a previous 30 day waiting period.
The Post Office has also restructured the cost of the product, which is underwritten by insurer Axa, from a flat premium of £4.50 a month for every £100 of cover to a risk-based pricing system. As a result, some customers could see their premiums fall to £2.50 per £100 of cover - but only if they do not have unemployment cover.
Others could see them soar to as much as £7.35 per £100 if they are considered to be high risk and have the maximum level of cover. However, customers will have the option of reducing their premiums, for example by waiting for 120 days before they receive any money.
A Post Office spokeswoman said: "We always strive to provide the best possible benefits to our customers and we've held our terms as long as we could, but the very tough economic climate in which we operate means that we've had to make adjustments to this product so we wrote to customers at the earliest opportunity to ensure they were fully aware of the changes."
The credit crisis and recession have prompted other insurers to make changes to PPI cover at a time when people are more likely to lose their jobs or become too ill to work with stress-related conditions.
Consumer group Which? has blasted back at the industry, accusing it of “moving the goalposts” on PPI and pointing out that insurers have been selling PPI for years, only to cut benefits and increase premiums when people need it the most.