Redundancy insurance

Redundancy insurance can offer financial protection if you lose your job. Here’s how to compare and find the best policy for you.

What is redundancy insurance?

Redundancy insurance, also known as unemployment insurance, provides cover if you lose your job. If you make a successful claim on a redundancy insurance policy, you will be paid a monthly sum of money.

The money can then be used to help pay your outgoings, such as your mortgage costs or household bills. It can be paid out for a set period of time or until you start working again. The money isn’t paid out straight away and you’ll need to wait until a pre-agreed period of time has passed before you can receive it.

What types of insurance are available if I lose my job?

There are several different types of insurance available to help if you lose your job. They include the following:

• Mortgage payment protection insurance (MPPI). This type of insurance is designed to specifically cover mortgage repayments if you’re unable to make them because you have lost your job.
• Unemployment insurance. If you are made unemployed you can use this insurance to cover a proportion of your wages for a set period of time.
• Accident, sickness and unemployment insurance (ASU). This is a more comprehensive insurance product as it covers you if you are made unemployed, but also if you’re too ill to work or have an accident which leads to you being out of work.
• Payment protection insurance (PPI). PPI, known mainly for the huge mis-selling scandal of the past decade, is an insurance product to cover specific debt repayments if you can’t make payments because you’re out of work.

What does it cover?

Each policy will have its own terms and conditions, but in general the following apply to most policies:

• If you’re made redundant and you weren’t expecting it.
• You’ll be given a sum of money for a set period, usually 12 months.
• The amount of money is pre-agreed and usually covers 50% of your previous salary.

What doesn’t it cover?

As with all insurance policies, not every scenario is covered. It’s important you understand what is (and what isn’t) covered with any insurance policy you buy. The following are usually excluded from this kind of cover:

• If you take voluntary redundancy.
• If you’re fired.
• If the reason for leaving is because of misconduct.
• You can’t claim if you leave your job because you haven’t passed a probation period.
• Part time workers and those on temporary contracts are usually excluded.

What cover do you need?

The type of insurance product you need will depend on your circumstances and your budget. You want a policy that will pay out if you need to use it, but not one that’s too expensive.

The first thing to do is look at what’s available to you if you are made redundant. If you could comfortably meet your usual outgoings, or you have someone else who could help, it may not be worth it.

It’s also worth looking at what’s in place with your employer. Depending on how long you’ve been working there, you may be in line for a payout and you also may be entitled to state benefits.

When should I consider purchasing redundancy insurance?

If you were made redundant and you would struggle financially to make your usual outgoings, this type of insurance could be a good idea. Before you buy, look at everything currently available to you. This will help you to decide if you need it, and how much cover you need, if any.

You may be considering this kind of insurance because of the coronavirus pandemic. If this is the case, it’s especially important to look at the small print, as some insurers may not allow redundancy because of the pandemic as a reason to claim. This should be made clear to you before you buy a policy.

What can I claim if I’m made redundant?

There are a number of measures in place if you are made redundant. These are valid even if you’ve been on the government’s furlough scheme, at your usual wage and not at the reduced salary you’ve been earning.

The exact amount you’re entitled to will depend on your job and how long you’ve been working. However, most employees will get statutory redundancy pay, set at £538 a week, as the very minimum amount if they’ve been working for the same company for at least two years. You’ll usually get one week’s pay for every year you’ve worked for a company.

Most employers have enhanced schemes available, so you could be due more money than this, and you’ll also be entitled to any annual leave you are due.

Bottom line

There are lots of policies available to help if you lose your job and you no longer have the money to pay for regular outgoings, such as your mortgage. This can be a great help and it gives you the peace of mind of knowing you won’t lose your house and your credit score won’t be damaged. However, before you buy a policy, it’s important to look at what’s already available, such as statutory redundancy or state benefits, and any other income streams, as you don’t want to pay for a new policy if you don’t need it.

We’re living through unprecedented and worrying times and the coronavirus pandemic has put many jobs at risk. It means that many people will be reassessing their finances and looking for extra financial protection, like redundancy insurance. However, many insurers have changed their policies with regards to unemployment protection, so, if you’re looking for a new income protection policy, make sure you double check the small print with regards to coronavirus if this is the protection you’re looking for.

Frequently asked questions about redundancy insurance

• How can I cut the cost of redundancy insurance?

  There are lots of different redundancy insurance policies available. The cheapest will have less cover and just provide protection for unemployment, while more expensive policies may include cover if you lose your job for other reasons, such as if you become ill or have an accident.

• How much statutory redundancy pay will I get?

  It depends on a few factors including the job you had, how long you were working for and your age. The very basic statutory pay is calculated on a week’s pay for every year you work for a company, and you need to have been working for at least two years to be entitled to this.

• Can I get redundancy protection if I'm self-employed?

  As you aren’t employed through a pay-as-you-earn (PAYE) scheme, you may not be able to take out a redundancy protection policy because you’re unlikely to be made redundant in the same way. However, there are lots of other income protection policies open for self-employed workers including Accident Sickness and Unemployment (ASU) insurance and mortgage protection.

• Does income protection pay out if I die?

  The reason for income protection is to protect your income, therefore a policy may not pay out anything if you die while you have the policy in place. This all depends on the policy in place though, with some longer-term policies providing a payout if you die.

• How long does an income protection policy pay out for?

  This depends on the policy you have. Some short-term policies last up to two years, while longer, more expensive policies can last until you retire or die.

• Does redundancy pay affect universal credit?

  When you apply for Universal Credit, the first £6,000 of your savings, which could include a redundancy payout, is excluded.