How to insure against redundancy in Britain’s uncertain job market

Do you have any form of redundancy insurance? Would you consider taking out a policy, or do you think it’s a waste of money? We’d like to hear from you – contact us at money@telegraph.co.uk.

Being made redundant is one of life’s financial disasters many of us don’t like to think about – but getting some form of “redundancy insurance” in place could provide some peace of mind if you were to suddenly experience a loss of earnings.

Redundancy is not uncommon – especially in certain industries – and as firms negotiate with employers’ National Insurance hikes, as well as increases to the minimum wage and Labour’s workers’ rights bill, we could see a growing number of people getting laid off.

Amid such uncertainty, it’s vital to have a plan in place to enable you to continue paying your mortgage and other household expenses should you find yourself out of a job.

Redundancy insurance is one option, but you need to tread carefully – while some policies can help tide you over should you lose your job, you need to ensure the products you plump for are right for your needs.

Here, Telegraph Money explains what redundancy insurance is, what types there are and whether it’s worth getting.

• What is redundancy insurance?
• Do you pay National Insurance on redundancy pay?
• Does income protection cover redundancy?
• Is redundancy insurance worth getting?
• Redundancy insurance FAQs

What is redundancy insurance?

While there is no “redundancy cover” per se, there are a few different types of income protection insurance which can help out if you lose your job.

Short-term unemployment insurance

This type of policy can cover a proportion of your salary specifically if you’re made redundant – rather than being unable to work for any other reason.

It won’t cover you if you take voluntary redundancy, or you’re sacked, and you won’t receive a payout if there was any suggestion that redundancies were on the cards when you took out the policy. 

You may also find it difficult to get covered if you work part-time – it’s best to check individual policy details to find out.

Mortgage payment protection insurance

One way to protect yourself against potential redundancy, is by taking out mortgage protection insurance. Policies usually start paying out three months after your salary stops coming in and continue to pay for up to 12 or 24 months, so you have another plan to cover the initial drop in earnings.

Pete Mugleston, mortgage expert at Online Mortgage Advisor, said: “[These policies] kick in if you lose your job through no fault of your own, covering your mortgage payments during this challenging period.”

While some policies may pay out an additional sum to help with other bills, don’t make the mistake of thinking this insurance will actually cover your income – paying for food and other essentials will need to come out of another source.

Accident sickness and unemployment

ASU, as it is known, covers you being unable to do your job due to accident or illness. It also covers the possibility of redundancy by paying you an income for the time you are not working.

Generally speaking, policies are taken out on a short-term basis, providing payments for up to one or two years.

Payment protection insurance

These policies cover payments owed for specific debts, such as loans or credit cards, in case you’re unable to keep up with them. We explain more about PPI below.

What about PPI?

You’ll likely have heard of PPI, which got thrust into the headlines a few years ago when a large-scale PPI mis-selling scandal was uncovered. But, sold correctly, it can be helpful.

In short, PPI typically covers repayments for credit card or loan debt if you find yourself in a position where you cannot keep up with them – including being made redundant. It can also cover things such as store cards, mortgages and catalogue accounts.

While ASU policies are similar, exclusions may be a little less onerous, and policies do not need to be linked to a loan. ASU should include redundancy provisions, too.

Do you pay National Insurance on redundancy pay?

National Insurance (NI) is not deducted from a redundancy payment. More specifically, the first £30,000 of any such pay is usually free from both income tax and NI contributions.

Anything over this, however, will be added to your income and may be subject to tax at your marginal rate. If you’re getting laid off, it is important to understand how much you will actually get once tax has been paid.

You also need to get your head around how to make this money last if you don’t manage to get a new job as quickly as you’d like to.

Does income protection cover redundancy?

Income protection is a type of insurance designed to replace a percentage of your income if you are unable to work due to illness or injury. It pays a regular tax-free income, with payouts typically set at between 50cpc and 70pc of salary. It covers both employed and self-employed workers.

As it can help cover essential living costs such as the mortgage, rent and bills until you are able to return to work – or ready to retire – it can offer a real safety net.

But don’t make the mistake of thinking this will pay out if you get made redundant.

Gary Smith, of wealth management firm Evelyn Partners, said: “Many employers include a form of income protection as a standard or optional employee benefit, but while this should cover illness and disability, it will very rarely protect against unemployment.”

The same is true of stand-alone income protection policies that you take out privately.

Moreover, it’s true of “short-term income protection”, a type of insurance that can temporarily replace a portion of your monthly earnings. This is usually 12 or 24 months and may be referred to as “budget income protection” as it costs less and only provides cover for a limited time.

According to consumer organisation, Which?: “Neither income protection – nor short-term income protection – pay out if you’re made redundant. What they may provide is ‘back to work’ help if you are off sick.”

Is redundancy insurance worth getting?

When deciding whether to take out a policy such as mortgage payment protection insurance, there are several factors to consider.

For starters, employment stability plays a big role.

Mr Mugleston said: “If you have a stable job with good benefits, you might not need mortgage protection insurance. However, if your job is less secure, it could be a valuable safety net.”

Just remember that most policies will not pay out immediately – there will typically be a “deferred period” of up to three months before payments kick in. This may not be particularly helpful as you may well have found another job by this time, and might have actually needed the money much sooner.

Also be aware that if you are self-employed or on a temporary contract many payment protection policies won’t cover you. Further, if you take voluntary redundancy, you will probably find your insurance won’t be of any use.

It’s essential to scour the terms and conditions of any policy carefully before you buy. You don’t want to find yourself spending hundreds of pounds annually on costly protection policies that are unlikely to pay out.

Equally, if you have a decent pot of savings put aside, this money can act as a buffer in case you’re unable to work, potentially reducing the need for this kind of policy.

Mr Smith said: “A fund of cash savings is an obvious and sensible safety net for both the employed and self-employed. I recommend having between six and 12 months of basic expenditure in your cash reserve for peace of mind.”

Redundancy insurance FAQs

Where do you find the best redundancy insurance?

Stand-alone income protection or mortgage protection policies are available from insurance providers and brokers. It’s vital to shop around and compare different providers to find the best deal.

Never buy one of these policies automatically from your loan provider or mortgage lender before finding out what’s on offer elsewhere.

Also be sure to look into other types of insurance and products that might offer similar protection.

Comparison sites can be a good place to start, or you can try sites such as Lifesearch or Drewberry Insurance, which specialise in these kinds of policies.

When should you consider buying redundancy insurance?

If you’re thinking about purchasing redundancy insurance, you need to do this when things are going well.

Crucially, if you hold off until redundancies have been announced – or until rumours about job losses are doing the rounds at your workplace – you won’t be able to claim.

Keep in mind that it’s worth looking to purchase this type of cover if there’s a decent likelihood of redundancy – but this is more than three to six months away – and if you think it’s unlikely you’ll secure another job within three months of being laid off.

Before taking the plunge, you need to be sure you understand the policy terms. The level of cover and exclusions can vary a great deal, so you’ll need to check the small print on your policy.

How much does redundancy insurance cover?

This varies depending on which type of policy you opt for.

With income protection, payouts are typically between 50cpc and 70pc of salary, and deferral periods can range from a few weeks to a few months. (Just note that the shorter the deferred period, the higher the premium you’re likely to have to pay).

Payment protection policies may only cover payments for up to 12 months. Some may pay out for up to 24 months, but they will usually be more expensive.

Also note that policies don’t usually pay out immediately. There’s typically a “deferral period” of around three months.

Mortgage payment protection policies pay out a set amount each month, this tends to be after three months.

Seek advice

If you’re not sure of the best type of protection policy for you – and any financial dependents you may have – it’s worth speaking to a financial adviser. They can help you find the right insurance for your needs.