Redundancy insurance

Redundancy cover is a type of income protection insurance whereby if you’re made redundant from your job, you’ll continue to receive monthly tax-free payments as a partial replacement for your wage. It can give peace of mind by allowing you to keep up with mortgage payments, bills and any other debts or loans you have until you find another job.

One thing to bear in mind, if you are considering redundancy cover, is that it cannot be applied for if you know redundancy is about to happen. Redundancy cover works on a ‘what if’ basis. For this reason, payments only start after a pre-agreed waiting period.

Redundancy insurance is also known as unemployment insurance and it typically provides up to 12 months of cover, if you lose your job due to involuntary redundancy.

In the UK, you’ll generally be able to insure up to 70% of your salary. However, if you’re earning big bucks then there may be a cap.   

When you compare life insurance policies, check the restrictions on redundancy pay-outs as each insurer will have their own limits. Generally, these fall into two categories: the maximum benefit, which is the highest income an insurer will cover as a rule, and the maximum cover, which refers to the highest percentage of an income that they’ll cover.   

As an example, let’s say you earn £20,000 and want to cover 75% your income, which is £15,000. An insurer, on the other hand, may have a maximum benefit of £10,000, meaning you only get 50% of your salary.

Most redundancy policies will also pay out if you fall sick or get injured and can’t return to work as a result. Plus, you may be able to protect any additional benefits you get as part of your job package, such as private health care.

There are a few different redundancy insurance options available to you:

• Payment Protection Insurance: or simply PPI by its more famous name. PPI insures you in the event you can’t work due to sickness, an accident or are made unemployed.
• Mortgage Payment Protection Insurance: is PPI that specifically covers your mortgage. It'll pay out for up to a year after your earnings have stopped, and usually you’ll take this out alongside a mortgage. MPPI is not redundancy or unemployment cover as such but could pay out to cover what's likely to be your largest living cost. 
• Short-term income protection insurance (STIP). This insurance replaces a proportion of your income for a fixed period of time (usually 12 or 24 months). It’s important not to confuse this with other income protection policies, which usually won’t pay out if you lose your job.

Please note that not all providers we work with may be able to offer all these types of cover. We recommend that you speak to an advisor to firm up your requirements and that you shop around for the most suitable policy for your needs.

Not everyone will qualify for redundancy cover. If you’re on a temporary contract, work part-time or are self-employed many payment protection policies won’t cover  you. Depending on your circumstances, you may be able to apply for these products but you should watch out for exclusions.

Furthermore, if if you’re not kept on for a permanent position after a probation period or if you’re asked to leave by your employer for reasons such as misconduct, you won’t qualify for a payment. Likewise, if you take voluntary redundancy. It’s also possible that you may meet limitations for redundancy insurance – or even not qualify altogether – due to your age.

Finally, if you know your job is at risk and there’s a likelihood of you being made redundant, for example if redundancies have already been announced at your place of work, then you won’t qualify. For this reason, policies tend to have an exclusion period of about 3-4 months from the date the policy is taken out before you can make a claim.

When you take out a redundancy cover, you and your insurer will agree on a date your policy will start once you’ve lost your job. Pay-outs typically start after a pre-agreed waiting period, called the ‘Deferred period’.

If you are able to wait some time before getting the first payment in, you’ll generally get cheaper premiums. While we all want to save money on insurance, be sure you can manage financially if you were to defer, as within this period you’ll have no income at all. That means calculating your savings and carefully budgeting for your mortgage, debts and any other living expenses you have.  

Typically, if you’ve involuntarily lost your job, redundancy cover will pay part of your income for up to 12 months afterwards or until you find a new job – whichever is sooner.

When it comes to protecting yourself in the event of redundancy, there’s not a one-size-fits-all solution. It’s a personal calculation on what you can afford to pay as a premium and the minimum amount you’d need following a successful claim. It depends on your personal circumstances, your savings, whether or not your mortgage is already paid off and the extent of any other loans you have, as these all determine the type and level of cover and even if you need protection in the first place