Unemployment Insurance in the UK Explained

Mark Benson

Mark Benson

Money Savings Advice Unemployment Insurance

In light of the ongoing coronavirus pandemic, there is a real threat of increased unemployment in the UK. As a consequence, many individuals are now looking towards unemployment insurance as a means of protecting their income going forward.

If you are faced with this situation, there are actions you can take and protections available.

What Is Unemployment Insurance?

Income protection is an insurance policy which is created as a means of subsidising your wages if you've an illness/injury that stops you working, of if you lose your job without it being your fault. You'll get between 50% & 70% of your usual wages.

We will now take a look at the world of income protection, what type of cover is on offer and what it will provide in terms of funding.

When you dig a little deeper, you will see there are numerous different elements to income protection, and indeed it is known by an array of different names.

Continue reading to get all the details

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What Is Income Protection?

Income protection is an insurance policy that is created as a means of subsidising your wages in the event of an illness/injury which stops you from working. In basic terms, when you take out your policy, you will define your salary at that time.

A typical income protection policy will pay between 50% and 70% of your normal monthly earnings. This can prove extremely useful if your employer does not have an enhanced sickness scheme and you revert to statutory sick pay.

How Does Income Protection Help People Who Have Been Made Unemployed?

While basic income protection covers illness and injury, it is possible to add an additional element of protection to cover unemployment/redundancy. This type of policy would only be a short-term arrangement (between 12 and 24 months) after which the cover and payments would terminate.

During the period you would receive a regular income paid by your insurance company. You would not be able to add such an additional element of cover to a long-term income protection policy; otherwise, your insurer could be paying out for many years!

Is Income Protection the Same As PPI?

No. Income protection would subsidise your reduced income in the event of illness/injury (or other elements affecting your policy) while PPI will simply cover repayments on a particular debt. They are very different.

How Many People Have Income Protection Insurance?

You may have considered income protection insurance if you feel that your job may be at risk in the short to medium term but how popular is income protection insurance? A recent survey confirmed that while 41% of the general public have life insurance and 16% have private health insurance, only 9% have income protection insurance.

Surely it makes as much sense to protect your regular income as it does to take out life insurance/private health insurance?

How Can I Protect My Income From Inflation?

If for example you received a salary of £50,000 when you took out your income protection policy but inflation in year one was 10%, then in effect you would need an income of £55,000 to maintain your spending power. If we saw a similar increase in year two, then you would need a salary of £60,500 to maintain your spending power.

Many people will be pleased to learn that it is possible to take out inflation/index-linked cover, but this will see an increase in your premiums - as well as your payments - in line with the consumer price index (CPI) or retail price index (RPI). There is a cost with the increased premiums, but it is a very useful means of protecting future payments.

Would I Pay Tax on My Unemployment Income Protection?

Under normal circumstances, any income protection received as a consequence of being made unemployed would be tax-free. There may be situations where funds are paid into a trust or some kind of alternative arrangement which could incur tax liabilities. While unlikely, if this was the case, it would be worth taking professional advice.

How Long Before I Start Receiving My Payments?

All income protection policies will have a deferral period after which time income payments will commence. This could be anywhere from 4 weeks up to a couple of years and will depend upon the type of policy and the level of cover. It is very unlikely that you would receive income protection payments immediately.

Will the Deferral Period Impact My Premiums?

Yes. The greater the deferral period, the less liability for your insurance company and as a consequence you can expect to pay lower premiums. It may be useful to extend the traditional deferral period if, for example, you have savings, or a redundancy package, which you could use in the short term.

If you are unsure as to what level of deferral would suit your particular circumstances, you should take professional advice.

Will Unemployment Insurance Impact My Benefit Claim?

In some circumstances, it will. There are some benefits that are means-tested, and as a consequence, they would be reduced depending on the level of unemployment insurance income.

You may find that a universal credit claim would be reduced by a pound for every pound you receive from your unemployment insurance policy. However, the basis on which benefits are calculated tends to change on a regular basis - especially after the introduction of universal credit and the amalgamation of many different benefits.

How Long Would Unemployment Income Protection Last?

While there will be the initial deferral period, beyond that you could expect to receive unemployment income protection for anywhere between 12 and 24 months. While you can buy long-term income protection, this would not include unemployment protection because of the potentially huge liabilities going forward.

Should I Take Advice About Unemployment Insurance?

Unemployment insurance should be considered alongside all of your other financial interests and debts. More and more people are now taking professional advice regarding different elements of income protection, such as unemployment insurance.

It makes sense to consider your position as and when you review your extended finances, investments, etc. It is strange to see how so few people have income protection insurance compared to the likes of life insurance and private health insurance. Surely our first thoughts should be to protect our regular income?

What Is the Difference Between Payment Protection Insurance and Income Protection Insurance?

While these two insurance policies revolve around the same issue, providing income after the loss of employment, they are very different. Payment protection insurance is shaped around your regular monthly payments such as a mortgage, loan payments, etc. if you have no regular payments, then you can’t buy payment protection insurance.

Income protection insurance offers protection on your monthly income as opposed to your monthly outgoings. As a consequence, income protection insurance is more expensive.

Can I Redeem My Company Shares if Made Redundant?

Many larger public companies offer their employees the opportunity to acquire shares at discounted rates. It will vary from company to company, but you may be able to negotiate a sale of your company shares earlier than expected.

You will also need to take into account any tax obligations as there are benefits to holding your company shares for an extended period of time. Redemption of company shares can be a useful form of income in the event of redundancy.

Can I Adjust My Insurance Cover As My Situation Changes?

When looking at any type of insurance cover, the chances are that your requirements will change from your 30s to your 40s to your 50s. It is therefore important that you adjust your insurance cover to reflect your current situation.

Many insurance companies will be open to requests to tweak your insurance cover in order to retain your business. However, it may be worthwhile taking advice from your insurance broker when looking to make any changes.

Are There Clear Cases Where I Won’t Require Unemployment Insurance?

There are a number of scenarios where you may not require unemployment insurance such as:-

  • Your partner/family is able to support you in the short-term
  • Early retirement may be an option
  • You could survive on government benefit payments
  • Your company has an enhanced sick pay scheme
  • You have sufficient savings to see you through the short-term

As you will see, there are some scenarios where this type of insurance cover is not required. However, as we touched on above, this should be reviewed on a regular basis as your situation, and your savings can change in a relatively short space of time.

Money Savings Advice Tip

In these uncertain economic times, there has never been a better time to protect your salary in case you are made redundant. Our top tip is to get a ‘whole market quote’ and get the best unemployment insurance that covers you based on your personal circumstances.

What Are Tied Insurance Brokers and Independent Insurance Brokers?

When taking the advice, you will be faced with the option of a tied insurance broker or an independent insurance broker. A tied insurance broker will have restrictions over which insurance companies they can deal with. An independent insurance broker will have access to the wider market and in theory, wider choice. The automatic assumption is that an independent insurance broker will always find a more competitive deal. This is not always the case!

Some tied insurance brokers are able to channel significant business to their tight-knit group of insurance providers. As a consequence, they can often demand extremely competitive terms and conditions which are often equal if not better than their independent insurance counterparts. You will find that some tied insurance brokers focus on particular areas of the market and can be extremely competitive.


Unemployment protection is not a standard element of an income protection policy, but it is something you can add on. Traditional income protection policies cover periods when you are unable to work as a consequence of illness/injury.

Thankfully, the industry is fairly flexible, and there is an array of other additions you can add to your basic income protection policy aside from unemployment protection.

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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