In volatile economic times, employment can rise and fall dramatically; therefore, you may be one of many people looking at unemployment protection insurance. This is a very useful means of subsidising part of your lost regular income in the short-term in the event you lose your job.
So, what kind of cover can you expect and how does it work?
There are many different strands to what is known as income protection policies. Traditional policies will provide cover if you can’t work as a consequence of illness/injury – either short term or long term cover.
Unemployment insurance is a type of insurance that will pay out between 50% and 70% of your regular wage if you lose your job due to economic uncertainty. If you lose your job due to a disciplinary you won't get the money.
Unfortunately, with redundancy cover, this is only a short-term arrangement generally up to a maximum of 12 months.
However, it can prove very useful, giving you time to find alternative employment while at least maintaining a degree of your previous income.
Keep reading and make your own mind up about if income protection insurance is right for you.
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The first thing to clarify is that this only relates to compulsory redundancy (as opposed to voluntary redundancy) and does not cover scenarios where you were made redundant as a consequence of a disciplinary process. It is traditionally called redundancy insurance and can be added as part of an income protection insurance package.
We know that the vast majority of insurance policies are never used, but they are a very useful backdrop in times of trouble. If you have mortgage payments, loans and credit cards and all of a sudden, your income disappears, you could very quickly fall into serious financial distress.
Unemployment protection insurance offers you short-term support, paying a regular monthly portion of your previous salary. If you have significant financial liabilities, then perhaps the question should be, can you afford not to have unemployment protection insurance?
When taking out an income protection policy, which includes redundancy insurance, you need to specify your salary at the time. There is some variation in the level of funds made available under this type of policy, but it tends to vary between 50% and 70% of your regular monthly income.
So for example, if prior to being made redundant you earned £2000 a month before tax, you would receive between £1000 and £1400 a month if made redundant.
No. As you pay the premiums yourself, these will come from your net income on which tax has already been paid. Therefore, funds received under any form of income protection will be free of taxation. While you will only receive between 50% and 70% of your regular gross monthly income the fact it is tax-free makes a huge difference.
While in exceptional circumstances, you may see unemployment protection extended to 24 months, the normal duration is 12 months. All policies include an initial period when no payments are made, which can be anything between 4 weeks and two years.
The deferral period would depend on your redundancy package, level of savings and financial liabilities.
The UK government is currently attempting to bring all benefit payments under the universal credit umbrella. You will find that some elements of the universal credit payment are means-tested. As a consequence income protection insurance payments may impact your ability to apply for these benefits.
It is important to highlight the fact that unemployment protection payments are likely to be significantly greater than any combined benefits.
As we touched on above, income protection policies (with various different elements) tend to pay out between 50% and 70% of monthly income. The higher the percentage, the higher your premiums, but this may be dictated by your financial obligations.
Let’s say for example you received £2000 gross per month and your financial obligations amounted to £1100 per month. Therefore, if you went for the 50% figure, this would not cover your obligations; therefore, it may be better to go for 60% or even 70%. This will provide you with enough income to cover your expenses and a small surplus on top.
No. If your policy is deemed to be “under the claim”, this means that you will be in receipt of financial assistance. As a consequence, you would not pay any unemployment protection insurance premiums during this period. When you return to work, or your unemployment payment cover expires, the insurance company will then start to take premiums again.
No. While a PPI policy will pay out when you are not able to cover your financial liabilities, this only relates to one specific debt. For example, if you had a PPI policy attached to your mortgage and were made redundant, then the PPI policy would be activated and cover your mortgage payments.
The payments would be sent directly to your mortgage provider. Unemployment protection insurance is also activated on redundancy, but the funds are paid directly to the individual as opposed to any specific creditor.
No. The monies will be paid directly into your bank account, and you will have total control over how these funds are used. It obviously makes sense to pay your monthly bills before anything else, but in reality, there are no restrictions.
Traditional income protection policies cover those suffering illness/injuries which prevent them from working. There are two distinct types of income protection which are deemed long-term and short-term:-
Short-term income protection policies tend to last between 12 months and 24 months per claim per condition. While income protection insurance will cover sickness/injury during this period, it is possible to add different elements such as unemployment protection.
This is best described as a comprehensive policy because it will cover those unable to work on medical grounds for as long as required. In the event that the medical issue was long-term, and you were unable to return to work, then payments would be maintained until your predetermined retirement date.
When you look on the Internet, you will see an array of information regarding income protection insurance policies, terms and conditions and much more. While this gives useful and interesting background when looking at income protection, it is advisable to speak with an expert.
Some of the information you may be reading on the Internet could be out of date, irrelevant for your situation and may not cover exemptions. If you speak to an expert in the field of income protection insurance, they will be aware of the latest market trends, market changes and policies more specific to your situation.
There is no set fee when it comes to charges. However, you tend to find that both tied and independent insurance brokers will use one of the following charging structures:-
Historically, there have been many complaints about a lack of transparency when it comes to charges. This situation has been resolved in recent years. New regulations now legally oblige insurance brokers to inform potential clients of their charging structure. This will also include any relations with third party insurance companies.
When seeking advice regarding income protection insurance, you will come across the terms tied insurance broker and independent insurance broker. Many people have a tendency to choose independent insurance brokers because they are seen as more “competitive”.
While a tied insurance broker will work with a limited number of insurance companies, this does not necessarily mean they are uncompetitive. Yes, an independent insurance broker will have access to the wider market, including new participants, but in reality, they can’t have close relationships with all parties.
If you step back and consider the situation from a distance, tied insurance brokers still have significant negotiating powers. If they are channelling all of their business via a small number of insurance companies, then this gives them a degree of influence.
In reality, there is no reason why a tied insurance broker could not match or even better the terms negotiated by an independent insurance broker. It is dangerous to make assumptions!
The majority of those seeking unemployment protection insurance will maintain the same level of cover from day one. In reality, your financial/personal situation is likely to change significantly through your 30s, 40s, 50s and beyond. Therefore, surely it makes sense to review your income protection insurance on a regular basis?
The vast majority of people will review their finances/assets on an annual basis to see how they are performing and what needs to be done. Therefore, it makes perfect sense to review your insurance cover in tandem with a full financial review. That way, you can change and adapt existing insurance cover to suit your specific requirements.
If you need to tweak your income insurance policy, then you should contact your insurance broker/insurance company. The chances are they will be flexible with regards to your new requirements. If not, you may need to seek additional guidance and make alternative arrangements.
The UK economy has been extremely volatile in recent years, and many people are concerned about their long-term job prospects. While income protection policies tend to focus on illness/injuries which impact an individual’s ability to work, it is also possible to incorporate unemployment/redundancy cover.
The ability to at least cover your monthly financial liabilities in the event of redundancy can remove some of the huge pressures.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Income Protection Insurance brokers. They have already helped thousands of people get the best Income Protection Insurance cover and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.
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