Income Protection Insurance, Just in Case You Are Made Redundant

Mark Benson

Mark Benson

Money Savings Advice Unemployment insurance & redundancy

Are you one of many employees in the UK facing redundancy? Are you concerned about how you will be able to fulfil your financial obligations if your regular income is removed?

Thankfully, there are ways and means of protecting your regular income using what is known as income protection insurance.

How Much Does Income Protection Payout?

In the event that you were made redundant, you could receive regular income up to 70% of your gross monthly income if you have income protection insurance. This is unaffected by any redundancy pay-out you also receive.

When comparing income protection insurance with redundancy, we will consider the different positions for compulsory redundancy and voluntary redundancy.

In these difficult scenarios, it is very important to be aware of your rights and the small print of your income protection insurance policy.

Making the wrong decision could prove to be extremely costly! Read our comprehensive guide and don't make the wrong decision.

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What Is Income Protection Insurance Against Redundancy?

Traditional income protection policies will pay out if you are unable to attend work as a consequence of illness/injury. However, it is also possible to add an additional cover, one of which is a redundancy cover.

Under an agreed schedule the income protection policy would cover an element of your monthly salary, normally for a period of up to 12 months, but this can be extended to 24 months, in the event you were made redundant.

Does the Level of Payment Take Into Account My Redundancy Package?

If you are facing redundancy, then it is important to negotiate the best package possible in case you fail to find alternative employment for some time to come. It is important to note that the level of your redundancy package has no impact on the level of payments from your income protection redundancy cover.

Should I Take Voluntary Redundancy?

One of the first options, when a company is looking to reduce the workforce, is to offer voluntary redundancy. Very often, this will include an enhanced redundancy package as a means of reducing long-term business costs.

Faced with the option of voluntary redundancy, it is important to balance the value of the overall package against the potential payments from your income protection redundancy cover. It is highly likely that your insurance company will not pay if you take voluntary redundancy, but it is important to check the small print.

Do I Pay Tax on Income Protection Payments as a Consequence of Redundancy?

No. Depending upon the particular details of your policy, you would receive between 50% and 70% of your gross monthly salary. Your salary is included when the policy is taken out, and any future payments would be tax-free.

When you consider the average costs associated with working, travel, lunch, etc. and monthly tax deductions, the gross payment range of between 50% and 70% starts to look more reasonable.

How Long Would Redundancy Cover Payments Last?

Redundancy cover tends to come under short-term income protection which normally lasts for 12 months but can sometimes be extended. When taking out your policy, it is very important to know these details as they could have a serious impact on your financial well-being.

The idea is that these short-term payments would see you through until you find alternative employment. When you also take into account your statutory/enhanced redundancy package, these two incomes could cover you for a significant period of time.

How Much Does Income Protection Insurance Cost?

The cost of income protection insurance will depend upon your individual scenario and your requirements. The long-term income protection cover is more expensive as it could payout for a number of years in various scenarios.

Short-term income protection is limited to between 12 months and 24 months per claim per condition and is, therefore, less of a liability for the insurance company.

What Factors Will Influence Income Protection Insurance Premiums?

There are many different factors to take into consideration such as:-

  • Level of cover
  • Type of cover
  • Deferred period
  • Medical history
  • Age
  • Occupation

For example, somebody with a labour intensive job will be more likely to be injured at some point compared to somebody who works in office administration. This is just one example, but it gives you an idea of the risk factors taken into consideration.

Would My Insurance Policy Redundancy Payments Rise With Inflation?

While traditional redundancy payments will likely continue for 12 months, in some circumstances, this could be extended to 24 months; this will depend upon the insurer. However, let’s say that you took out an insurance policy five years ago when you were earning £30,000 a year.

Your premiums would have been calculated on this figure, and you would receive a portion of this figure upon compulsory redundancy. However, in theory, you would have lost a degree of your relative spending power if you’re insurance payments were not adjusted for inflation.

Some policies will allow you to introduce an element of inflation/indexation as a means of maintaining your spending power going forward. Again, like so many variables associated with income protection, it is important to know the details of your policy from day one.

Will Income Protection Payments Impact My Entitlement to Benefits?

You will find that some benefit payments are means-tested while others are made available to individuals in a particular situation, such as the unemployed. So, there will be scenarios where the level of income from your insurance policy (plus savings and your redundancy package) may impact your ability to claim certain benefits.

These are all factors which need to be taken into consideration when looking at income protection in its many different forms.

Is Income Protection the Same As PPI?

No. Income protection will pay the policyholder an agreed percentage of their gross salary each month. There are absolutely no restrictions on what the individual can do with those funds, but obviously, it would be sensible to continue with all financial repayments.

When it comes to PPI, each individual PPI policy is assigned to a particular debt, whether this is a mortgage, loan, credit card, etc. When a PPI policy is triggered, payments will be made directly to the individual creditor – not to the policyholder.

What Is the Deferred Period on an Income Protection Insurance Policy?

If for example, you were made redundant with a relatively large redundancy package, it may not make sense to activate your income protection policy straightaway. In theory, at least part of your redundancy package could cover a few weeks/months of expenditure.

As a consequence, extending the deferred period until your insurance payments kick in would result in lower premiums simply because the liability of the insurance company is reduced.

Should I Consider Payment Protection Insurance?

This may well be a consideration if you are unable to afford income protection insurance. Payment protection insurance at least guarantees that your regular monthly charges will be covered. The timing and duration of payment protection will vary according to your policy.

However, it does offer a very useful means of protecting your home and financial liabilities while you search for new employment. As with any insurance policy, the true value will only emerge when you really need it, in the meantime, it is a very useful support to have.

Should I Take Advice on Income Protection Insurance?

There are many factors to take into consideration with regards to income protection insurance. For example, some of your financial loans may already have PPI cover so you can effectively remove these charges from your calculations.

In many ways, the Internet has changed the financial markets for the better, but unfortunately, not all information online is correct, and some is out of date. It is therefore important to consider taking professional advice from an insurance broker who specialises in income protection insurance and other similar types of cover.

When seeking advice regarding income protection insurance, you will come across independent insurance brokers and tied insurance brokers.

What Is an Independent Insurance Broker?

As the term suggests, an independent insurance broker is not tied to any one or a small group of insurance companies when seeking income protection insurance for a client. They have full access to the market, and in theory, you would expect them to secure extremely competitive terms.

One interesting benefit of an independent insurance broker is the ability to deal with new entrants to the marketplace. On a side note, while independent insurance brokers have access to the whole market, in reality, they will have a relatively small number of insurance companies with whom they have extremely close relationships.

This allows them significant leverage when negotiating the best terms for their clients.

What Is a Tied Insurance Broker?

A tied insurance broker is restricted to the number of parties they can deal with when seeking income protection insurance for clients. On the surface, many people might assume they are less competitive than their independent insurance broker counterparts.

However, this is not always the case. A tied insurance broker may channel sufficient business through their partners to allow them a strong negotiating position. As a consequence, there is every chance they will be able to match their independent insurance broker counterparts or even better then.

Money Savings Advice Tip

In uncertain economic times, thousands of people are expected to be made redundant, and this looks set to continue for the foreseeable future. Being made redundant can be very stressful, especially if you only qualify for statutory redundancy. Speak to an Income protection specialist who can provide a whole market quote for redundancy cover that meets your requirements and is based on your personal circumstances.

Should I Include My Insurance Cover in My Annual Financial Review?

Yes. For some reason, many people look at their insurance cover and the annual financial review as two separate entities. The fact is these issues are very closely entwined and should be reviewed at the same time. A change in your financial situation could impact the degree of income protection insurance required, or indeed whether any is required.

You will find that levels of insurance required in your 30s can change dramatically in your 40s and 50s and beyond. It is therefore very important to regularly review all of your financial assets, including insurance cover.

Summary

Income protection comes in many shapes and forms with one popular additional option that of redundancy cover. This can prove to be extremely useful in the aftermath of redundancy as a means of covering your debt repayments, mortgage, rent, etc. going forward.

However, it is very important you are aware of your employer’s sickness policy, the details of your insurance policy and how best they can be used together. Is there an opportunity to introduce a prolonged deferral period to lower your premiums?

How Can Money Savings Advice Help You With an Income Protection Insurance?

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.

Money Savings Advice Author Mark Benson

Mark Benson

Mark has been writing professionally for over ten years for the financial sector. Having started in the financial world as a stock-broker in central London and then moving to equities trader Mark is one of our senior financial writers who has a vast knowledge of multiple financial sectors.

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