Income protection insurance and redundancy: What you need to know

September 22, 2015

During times of economic uncertainty, the spectre of redundancy can hang heavy in the air – especially for employees of some industries more than others.

Times have a habit of changing rapidly these days, and where once heavy industries served the UK’s workforce well, in later decades the shift has been away from coal and steel and has lurched with much gusto towards ecommerce and IT generally.

Irrespective of what sector you work in though, where you do it and in what specific role you excel, the days of jobs for life are long gone.

In an employment landscape increasingly shaped by freelance arrangements, part-time opportunities and the much-maligned zero hours contracts, holding down a full-time vocation has never seemed more challenging.

With shoulders constantly glanced over and forward-planning with regards to how and when you’ll start progressing a particular career ladder not as prominent as it once was, official unemployment figures fluctuate weekly.

So with the on-going unpredictable nature of the wonderful world of work showing no signs of letting up any time soon, having some form of protective financial bubble in place is more important than ever before.

One of the biggest outstanding questions regarding income insurance however, is just how such a dedicated policy would step up to the table in the event of the insured party being made redundant through no fault of their own.

While it’s well publicised that income protection insurance packages provide financial support should the policyholder suddenly be struck down with a serious illness or suffer a career-threatening injury, much less is documented about how a policy will work if you are made redundant.

Accident, Sickness and Unemployment-based policies offer the best options for guarding against unpredicted redundancies

So, what do we know about how redundancy affects an income protection policy from the insured party’s viewpoint?

Well for a start you might as well forget about arranging two of the most popular types of this specific cover (both whole-of-life/long-term and short-term income protection), as by and large redundancy isn’t well covered in these instances.

These polices are more geared towards offering monetary lifejackets for those facing up to serious health and injury implications.


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That said, you have the option of being able to purchase what is essentially ‘unemployment insurance’ as a stand-alone plan to run concurrently with a conventional income protection policy.

This leads us to ASU cover. Accident, Sickness and (the clue’s in the title) ‘Unemployment’ policies tend to be built around the requirements of those whose incomes are compromised by losing a job as much as befalling injury or illness, and as such would be the type of income protection insurance policy we’d always recommend. This variation on an income protection theme is of utmost importance if you have reservations about whether or not you could cope – in a monetary sense at least – if and when redundancy rears its ugly head out of the blue.

Be mindful that ASU policies are time-conscious plans, and come under the insurance category of ‘term’ or ‘fixed term’ cover. This translates as the policy only ever paying out for a limited period which the insured party has pre-agreed.

In many cases this passage of time corresponds with (and is meaningfully aligned to) the duration of a sizeable financial expenditure; be it culminating with a mortgage being paid off or a personal loan reaching its maturity. So therefore if a policyholder’s employment situation changes drastically at any juncture within this period then the ASU policy would step into the breach and take up the outstanding payments where the policyholder left off – providing all the pre-qualifying criteria has been fulfilled at the point of the claim being filed, of course.

Time frame-wise and this duration could realistically range from a few months to a couple of years. Having said that – and unlike a broader income protection plan which recompenses the policyholder indefinitely until such time as they make a recovery/return to work, reach retirement age or, more fatalistically, die – an ASU policy will only play its financial part up until that set time is acknowledged at which point the benefits terminate as per the initial understanding/agreement.

ASU policies can act as bolt-on redundancy-safeguarding features to existing long-term plans

Elements of ASU policies which anyone considering applying for one will need to be aware of from the outset include the following:

The longer the cover is provided for, the more expensive the premiums will be.

What’s more, a large percentage of this type of redundancy-assisting plan won’t start paying-out until the policyholder has been unable to continue their normal means of employment for a minimum period; typically 1 month.

As is the case with other income protection insurance, the longer the time you choose to defer the first ASU payment you receive (once the conditions have been met), the cheaper the premiums are. So our advice would be to ensure you factor in any employer or state benefits you might be entitled to by law in the interim period prior to establishing just what sort of deferment time scale would provide the optimum help.

This could take the form of either employer or state-funded statutory sick pay.

If you have some savings to fall back on during this effective limbo period, then you may wish to get by using this means to an end, but if you have no financial contingency plans to ease your burdens through this open-ended period then it’s worth noting that you can arrange what’s known as a ‘Back to Day 1’ ASU policy.

Essentially this monetary safety net offers payments back-dated to the first day you were off work, on the proviso that the insured party is off for a minimum of 31 consecutive days to trigger this feature.

As we touched on earlier, despite the more orthodox and readily available long-term and short-term income protection insurance policies not usually comprising a separate unemployment/redundancy element to their make-up, there’s nothing stopping individuals arranging a bespoke one as an additional feature to run in tandem with an existing (and admittedly more far-reaching)  income protection package.

Irrespective of whether this plan is adopted under the policyholder’s own steam or as part and parcel of their current employer’s benefits package. Again, although operating as a separate entity, it follows similar protocols to the typical ASU policy previously explained. This even results in the mirroring of the accepted and maximum benefit period being pre-set at either 12 or 24 months. This seeming ‘redundancy insurance’ for all intents and purpose does offer more competitively priced premiums when compared to the more fully encompassing long-term/whole-of-life plans though, as understandably you aren’t receiving the complete, unrestricted coverage which comes as standard on an all-conquering accident, sickness and unemployment policy.

Looking at how it all works in terms of how much a policyholder would expect to receive, as ever that can only really be decided by the insured party before the plan is underwritten and depends on individual circumstances and just what fiscal amount they believe would compensate for the sudden loss of earning, whilst taking into account the continued payments on mortgages and loans, etc…

Historically it’s possible to protect up to 70% of your gross annual earnings, with pay-outs being tax-free. Additionally, although at the discretion of income protection insurance providers themselves, the option of ring-fencing the value of any employee perks – along the extra-curricular lines of company cars and/or private health insurance – are available to the policyholder.

Just remember there are certain exclusions to be au fait with before enquiring further about any form of income protection insurance plan, not least that if you disclose (or it later emerges that) you’re at accepted risk of unemployment at the point of taking out a policy, then the proposer risks not being covered in the event, while the declaration of any pre-existing medical conditions would also render the would-be coverage invalid from the outset.