Does Income Protection Cover Redundancy?

In times of tough economic conditions, we begin to see a high number of layoffs, that could leave many people wondering, does income protection cover redundancy? 

There is much confusion about what the policy does and doesn't cover. In this insight, we'll delve into redundancy, income protection, and the best ways to protect your family from unexpected financial setbacks.

Key Takeaways

• Income protection covers accidents and illnesses that prevent you from working and pays 50-70% of your monthly gross income.
• Income protection does not cover redundancy, so you should consider unemployment insurance instead.
• Unemployment insurance pays a portion of your income for a fixed term of up to 12 months if you lose your job through no fault of your own.
• PPI was available tied to your mortgage or loan repayments and is not the same as unemployment insurance.

Does income protection cover redundancy?

Income protection does not cover redundancy. However, it will pay you if you are unable to work due to illness or accident. If you need redundancy cover you should consider unemployment insurance instead.

Income protection only provides cover whilst you are working. It pays in the event of illness or accident to cover up to 70% of your income. 

If you lose your job, your policy will become invalid. However, it may be possible to freeze your policy and premiums if you speak with your adviser. It is important to understand the terms and conditions of your policy to ensure you have adequate coverage for your needs.

What does income protection cover?

Income protection is a type of insurance that covers accidents and illnesses that prevent you from performing your specific job. Unlike critical illness policies that only pay out if a certain illness is diagnosed, income protection pays out depending on the impact of the condition on your ability to work. Claims are assessed individually, taking into account your unique circumstances, such as your job and the injury. For instance, if you are a jingle writer who plays the piano daily and you break your hand, your income protection policy should pay out if this injury stops you from performing your job.

What does income protection pay?

When you make a successful claim, income protection pays out between 50-70% of your monthly gross income. However, it only kicks in after a deferral period, which is typically 2 weeks to 6 months, and is chosen when you select your policy. You can opt to have income protection kick in once your sick pay through your employer runs out. If you are self-employed without sick pay, you can choose a shorter deferral period. Income protection will continue to pay out until you are well and able to return to work or until the policy's maximum benefit period is reached.

Let's say you earn £40,000 a year and have an income protection policy that pays out 60% of your salary if you are unable to work due to illness or injury. If you become unable to work and make a claim, your policy would pay out £24,000 per year (i.e. 60% of your annual salary). This payment would continue until you are able to return to work or until the policy's maximum benefit period is reached.

Can I add redundancy cover to my income protection policy?

When you review your protection insurance, if you have concerns about the financial impact caused by being made redundant you should discuss this with your adviser. Although income protection does not cover redundancy, there may be options available for you to put cover in place in the form of unemployment insurance. 

Alternatives to having redundancy cover in income protection

As income protection does not include redundancy cover, you may want to consider the feasibility of some alternative options. This could come in the form of:

• Standalone Unemployment insurance 
• Accident, sickness & unemployment insurance
• Relying on redundancy cover provided by your employer
• Relying on government support in the form of Job Seekers Allowance.
• Mortgage payment protection insurance
• Payment protection insurance
• Short term protection insurance

If I need redundancy cover in my income protection policy, what should I do?

Talk to your insurance adviser to discuss your options. As traditional income protection policies do not provide redundancy cover you will need to find alternative options to cover redundancy. Redundancy cover can be provided through Unemployment insurance.

When will I not be covered for redundancy?

You need to have had your policy in place before redundancies have been announced. That would include if you hear a rumour of expected redundancies as despite not being announced, they may still have been agreed and this would invalidate your claim.

You will not be covered for a claim if you opt to take voluntary redundancy. 

If you are a self-employed, part-time, voluntary or temporary worker it is important to check your policy details to ensure you understand whether you are or aren't covered.

What is unemployment insurance?

Unemployment insurance is designed to help you cover your bills while you search for work. It typically pays a portion of your income for a fixed term of up to 12 months and is only applicable if you lose your job through no fault of your own. Some unemployment cover can be extended to include accidents and illnesses, and these policies are known as ASU (Accident, Sickness, and Unemployment) cover. Some ASU policies are only available if they are linked to a mortgage or loan. It's important to understand the terms and conditions of an ASU policy to ensure it meets your needs.

Is unemployment insurance the same as PPI?

Unemployment insurance and PPI are not the same. PPI is exclusively available for mortgage or loan payments, and only the repayment amounts are paid during a claim. In contrast, unemployment insurance provides an income to replace your salary, which is typically paid directly to you. This benefit can be used in any way. In certain cases, unemployment coverage may be offered if it is linked to a debt.

Can I get unemployment insurance if I am self-employed?

It's possible for self-employed workers to obtain unemployment insurance. However, it is important to note that as a self-employed individual, it can be challenging to determine whether you have been made redundant or if you simply do not have enough work. While it may be difficult to provide evidence to support a claim, it is not impossible. As an alternative, you may want to consider income protection coverage instead of unemployment coverage to ensure that you have coverage if you are unable to work due to illness or injury.

Do I need redundancy cover?

Whether or not you require redundancy cover is a personal decision that is influenced by your individual circumstances and concerns.  To make an informed decision, it's a good idea to ask about the terms of redundancy with your employer's HR department.

• What is the amount of the redundancy package?
• How long will it last?
• How long do you anticipate it taking to secure employment again?

Consider your current expenses and whether it is possible to maintain your current standard of living without your regular income.

It's advisable to consult an insurance advisor to assess your protection requirements and recommend appropriate coverage options

Now you know the answer to the question, does income protection cover redundancy, you may be looking at your other insurance plans. If you are unsure where to start with seeking Insurance advice, complete the Sunny Avenue Fact Find. The information you provide helps us to find the best-suited adviser for your needs. Your adviser then contacts you for a no-obligation conversation on how they can help. You decide how to proceed.