Unemployment insurance

Unemployment insurance is a type of income protection that provides a monthly income if you lose your job. We’ve looked at what it includes and how you can compare insurers and find the best policy for you.

What is unemployment insurance?

When you buy unemployment insurance, you pay a monthly premium to an insurer and then, if you lose your job, it will pay you a monthly sum of money for a set period of time.

There are lots of different types of income protection insurance policies and it can be confusing to pick the right one.

Unemployment insurance will only cover you for unemployment under certain circumstances, and doesn’t provide cover if you become ill or you have an accident which means you can’t work. This type of cover is known as accident, sickness and unemployment (ASU) insurance.

How does unemployment insurance work?

When you buy unemployment insurance, an insurer will ask you lots of questions about your health, lifestyle and employment. From these details it will calculate how likely you are to make a claim and then charge you a set amount to pay it each month, known as your premium. You need to continue paying this every month in order to keep the policy in place.

If you are made redundant or you lose your job, you can make a claim on the policy. It will then pay a monthly sum of money, which is usually up to 65% of your usual income, for a set period of time until you find a new job or until you retire, depending on the policy.

What does it cover?

Unemployment insurance covers you if you lose your job. Each insurer will set its own specific scenarios it covers, but in general, the following apply:

• Any unforeseen unemployment
• Redundancy
• Losing your job, and it being out of your control

What doesn’t it cover?

There are some general exclusions unemployment insurance does not cover. These include the following:

• If you are fired.
• If you lost your job because of the coronavirus pandemic, you might not be covered.
• If it’s your decision to leave your job.
• If you lose your job because of industrial action.
• If there was some kind of misconduct involved with leaving your job.
• If you haven’t been working for the company for long enough (some insurers state you need to have been at the same firm for 24 months before you can claim).

How long does unemployment insurance last for?

You can choose how long you’d like an unemployment insurance policy to last for. A short-term unemployment insurance policy will last for 12 or 24 months and is usually cheaper to buy. A long-term unemployment insurance policy can last until you reach retirement age, and is more expensive.

What types of unemployment cover are there?

It can be confusing picking a type of unemployment cover because there are several to choose from. They include the following:

• Level cover. Your payout is fixed for the term of the policy and doesn’t change.
• Inflation-linked cover. The amount of money being paid out is linked to inflation and will rise each year in line with the rate.

How much does unemployment insurance cost?

The amount you pay for this type of insurance depends on lots of different factors including the following:

• Your age and health
• Your profession and how long you’ve worked
• The amount of cover you are looking for
• The length of the policy

How to get the best unemployment insurance

There are some simple steps to follow to ensure you find the best policy for you.

1. Do you need it? The first question to ask yourself is whether you need this type of insurance. If you could comfortably cover a loss in income – through savings, another source of income or through benefits – then you don’t need it.
2. Are you already covered? Would you receive any benefits from your employer or through the state if you lost your job? It’s worth finding this out first before you buy a policy. It’s also worth checking any other insurance policies you have, such as those included with packaged bank accounts, to see if you have any existing cover in place.
3. Is this the best policy for you? There are lots of different types of income protection and it can be confusing to pick just one. Therefore you need to look at what’s included with each and how much they cost.
4. Compare insurers and policies. There are lots to choose from and it’s important to compare policies to make sure you’re picking one that meets your needs, but also one which is at the right price for you.

When can I claim unemployment insurance?

If you lose your job, you can make a claim on your unemployment insurance, but there is a period of time you’ll have to wait until you receive the money. You will likely need to wait around six months (but this could be more or less depending on the insurer) between buying the policy and making a claim.

The bottom line

In 2020 we all had to think a lot more about our finances, as the coronavirus pandemic meant lots of UK workers lost their jobs.

If you’re worried your job is at risk, a policy like this could help. However, before you buy it’s important to check the small print. Some insurers may not take on new customers who want to claim for job loss because of the pandemic, so take a few minutes to read the small print if this relates to your situation.

Frequently asked questions about unemployment insurance

• Will unemployment insurance cover 100% of my income?

  No. You can usually receive a sum of money to cover up to 65% of your income, but this will depend on the specific insurer.

• What if I'm self-employed?

  You can still buy this insurance if you are self-employed, but you’ll have to provide details of your annual income to an insurer when you take it out. This can be taken from your last tax return.

• Do I need life insurance too?

  Life insurance works in a different way to unemployment insurance. It provides a lump sum of money to those who are financially dependent on you if you die (and, in the case of some policies, if you become critically or terminally ill).

• Can you buy insurance in case you lose your job?

  You can buy this type of insurance, but there is a waiting period which can be up to six months before you can claim. This is to stop people buying it if they know they’re about to lose their jobs.