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If you lost your job, could you afford to pay a mortgage or rent, as well as any bills, while looking for a new role? If you're not sure, for peace of mind you might want to consider taking out redundancy insurance.
This will pay out a proportion of your salary for up to a year, or perhaps two years.
But exclusions apply, and redundancy insurance isn't a substitute for emergency savings - generally defined as three months worth of expenses if you're employed.
Here we describe how redundancy insurance works and the various types available.
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In order for redundancy insurance to pay out, however, you must lose your job through no fault of your own – called involuntary redundancy.
If you were sacked as a result of your own wrongdoing or you volunteered for redundancy, then you're behind the reason you're now unemployed and the policy will not pay out.
It's worth noting that redundancy insurance, sometimes known as unemployment insurance, usually has a grace period at the start of the policy when you cannot claim – the first three months or so.
You also cannot claim if you knew the company was making redundancies before you took out the policy. Insurance companies monitor firms and industries, and may refuse to provide cover if they suspect there will be job losses.
You can set how long after losing your job you want payments to begin. Bear in mind policies work on paying you at the end of each 30-day period you remain unemployed. This means exclusions are written as:
If you knew you were getting two months’ money in your redundancy pay, you might choose a 90 day back to day 60 exclusion. This means the policy starts working after 60 days of continuous unemployment. If you remain unemployed after 30 more days, it will pay out on day 90 for the preceding 30 days.
You can also choose your level of benefit. A standard level would be 65% of your salary but, if you knew you needed less, you could reduce your premiums by opting for a smaller monthly payout.
Policies marketed as redundancy insurance are actually a form of accident, sickness and unemployment (ASU) insurance.
Some providers will sell just the unemployment cover without the accident and sickness elements. Many more will offer unemployment cover if you have also bought the accident and sickness cover. Because this brings in more competitors, it can be cheaper to buy all three in one policy. Note that more companies will give you a quote if you have a mortgage, rather than if you rent or own your home outright.
Most policies will pay out for a maximum of one year, though some two-year deals do exist.
This type of policy is categorised as general insurance, which has a different regulatory regime to protection products such as life insurance and income protection insurance. As a general insurance product, the premium and exclusions can be changed every year or with 30 days’ notice.
Some policies even have cancellation clauses, so the insurer can cancel the policy if they think the risk of redundancy is rising. Many cancelled cover when Covid struck and people faced losing their jobs. There are usually restrictions on how long you can be out of the UK for too, so check the small print.
If you have a mortgage, your insurance seller should make clear in the documentation that the payout is either entirely or partly to fund your mortgage.
This element will then not be considered as income if you need to claim benefits. This is the same for specific mortgage payment protection insurance.
Kathryn Knowles, managing director of Cura Financial Services, provided some hypothetical quotes in September 2024. These are based on a non-smoking 39-year-old administrator in a computer services company. They earned £30,000 and the payout was set at 65% – £1,625 a month for 12 months.
Only a small number of companies offer just unemployment insurance so the quotes were:
Adding accident and sickness brought in some cheaper quotes. The 60 days back to 30 exclusion came in at £45.50 and there was a 120 day back to 90 quote of just £30 a month.
Maybe. You need to work out how long you could live on your savings compared with how long you think it would take you to find another job.
If you are comfortable that you would be back in work before your savings ran out, then there would be no need for a redundancy-only policy.
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If you're offered a good redundancy deal, either in your contract of employment or through a trade union negotiated agreement, you may feel confident that you will be able to find a new job before you have spent all your redundancy payment.
If you accept an enhanced redundancy package to take voluntary redundancy, then such a policy would not pay out anyway.
Advisers will recommend policies based on your personal circumstances, but life insurance and income protection policies will be high on their agendas.
Income protection is medically underwritten when taken out but the premiums are then either set and fixed or rise each year by a specified amount. Even if you then develop a serious condition, the insurer cannot cancel or reprice the product. With an accident and sickness policy, the insurer can add exclusions for specific injuries or illnesses or for certain activities, such as certain sports or motorcycling.
Income protection claims are typically paid until the person returns to work, retires or the policy ends. Options exist for maximum claim periods of one, two or five years, which can make cover more affordable.
These policies also offer help getting back to work and services such as physiotherapy and mental health support. Some will also pay out if you need to take time off work to nurse an ill or injured child. Income protection is also available for the self-employed and small business owners.
It’s best to take out income protection insurance and life insurance when you are young, fit and healthy as the premiums will be low and, as a regulated protection product, set for the rest of your life.
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