Income protection insurance and redundancy

Income protection and redundancy insurance

If you rely on your income then losing it can be a devastating blow. Fortunately, there are insurance policies you can take out to lessen that blow, but many people are either unaware of the protections that exist or don’t know how they work. 

Income protection insurance gives you regular monthly payments to replace most of your earnings if illness or injury temporarily stops you from working.

Redundancy insurance gives you regular monthly payments if you’re made redundant while you look for another job.

In this piece we’ll be looking in detail at the similarities and differences to give you a good idea of exactly what they do and how they work. Bear in mind that Eleos doesn't currently offer redundancy insurance.

Does income protection cover redundancy?

Income protection insurance is designed to give you financial protection if you get injured or fall ill and have to stop working temporarily. Redundancy insurance however, is a stand-alone policy that covers you if you were to be made redundant from your job. Both policies are very different but can work well together.

What is Redundancy insurance?

Redundancy insurance is a type of insurance policy that gives you financial support if you lose your job due to involuntary redundancy. It helps you to cover your living expenses and financial commitments while you’re looking for a new job.

How redundancy insurance works

If you’ve been made redundant you’ll usually get some level of financial support but it may fall short of what you actually need. Redundancy insurance is designed to address that shortfall.

By law, if you’ve worked for your employer for at least 2 years, they must give you statutory redundancy pay. If you’ve worked there for less than 2 years you don’t qualify. Additionally, what you get also depends on your age.

• Under the age of 22: half a week’s pay for each year with your employer
• 22-41: one week’s pay for each year
• 41 or over: one and a half week’s pay for each year.

However, it’s not quite as straightforward as it sounds, for four reasons:

1. If you earn more than £700 a week, your redundancy pay won’t be worked out on the pay you actually receive, but on the maximum figure of £700.
2. If you’ve worked for your employer for more than 20 years your redundancy pay won’t take account of the years you’ve worked above 20 years. The most you will get is an amount based on 20 years of employment. The maximum length of service you’ll be paid for is 20 years.
3. Whatever you earn and however long you’ve worked, the maximum statutory redundancy pay you can get is £21,000.
4. Your employer may choose to pay more than the statutory amount, but if your redundancy payment is £30,000 or more you will have to pay tax on it.

Your employer is free to do more than the law requires, so you should check what provision there is for redundancy in your contract. If your employer offers only the statutory amount it may be worth considering redundancy insurance.

What does redundancy insurance cover

Redundancy insurance will not pay you if you’re made voluntarily redundant. This is an important point, because many people agree to take voluntary redundancy when their employer is cutting the workforce. It usually means you’ll get a better deal than the statutory amount, but if you accept redundancy willingly your employer has no obligation to pay you. That’s why you should check your contract to see what you’re entitled to.

How does redundancy insurance pay out?

You take out a policy while you’re in work, then if you do get made redundant you make a claim from your insurer. It’s much easier to get cover if you’re in full-time rather than part-time work. Your policy will pay you a proportion of your income, which is usually up to 70% of what you were earning. This is approximately the same as your take-home pay after income tax and national insurance.

Most redundancy insurance policies will pay you until you’re back in work, for up to 12 months, to give you enough time to find another job.

Policies generally include a waiting period, which you choose when you take out the policy. This is the length of time you feel able to manage financially until you need to start receiving your benefit payments. The longer the waiting period the lower your premiums will be.

If you pay for the policy yourself, rather than your employer, for example, the payments you receive are tax-free.

The main advantages of redundancy insurance

Redundancy insurance can provide a safety net that gives you financial security over and above your legal entitlement. Here are some of its most attractive advantages

•  It can cover you for up to a year while you find another job after you’ve been made redundant.
•  You can usually customise your policy to suit your needs, such as specific expenses like mortgage or rental payments.
•  You’re likely to pay relatively low premiums because the cover lasts for only a limited time.
•  The premiums are fixed which makes budgeting easy.
•  It gives you an extra layer of financial security on top of any redundancy payment you receive from your employer.
•  The benefit payments you receive are tax-free.
•  Even if you never face redundancy, it gives you peace of mind.

The main limitations of redundancy insurance

Redundancy insurance can give you valuable protection against the financial impact of losing your job through no fault of your own, but it’s important to be aware of its limitations.

• It only covers you for involuntary redundancy, so if you formally agree to take redundancy you won’t be able to claim.
• Even though it doesn’t cover your health, a redundancy insurance policy may still exclude some pre-existing conditions or circumstances that were known about before it was taken out.
• The waiting period means you won’t receive benefit payments immediately on being made redundant, but this is common to all financial protection insurance.
• Some policies impose a cap on the total benefit you can receive.
• If you’re made redundant again soon after taking a new job there could be a period in which you’re not entitled to make a second claim.

Comparing income protection and redundancy insurance

Both types of insurance protect you in the event of losing your income, but bear in mind these fundamental differences.

Income protection insurance pays you a replacement income when you can’t work because of illness or injury

Redundancy insurance pays you if you lose your income through being made redundant.

Income protection insurance claims need to be supported by medical evidence.

Redundancy insurance claims need proof of redundancy.

Income protection insurance covers you until you’re able to work again up to the time limit in your policy, which could be 2 years or more, depending on the policy.
Redundancy insurance usually pays you for up to 12 months after you’ve been made redundant.

Income Protection Insurance doesn’t cover unemployment through redundancy.

Redundancy insurance doesn’t cover voluntary redundancy or the inability to work because of illness or injury.

Income protection insurance premiums vary according to the length of cover, your health and your occupation.

Redundancy insurance premiums can be high, especially for high-risk jobs.

Income Protection vs redundancy: how to choose

Redundancy insurance is helpful for certain groups of people, including:

• Employees in industries or companies where you know that redundancy is a risk.
• People with serious financial commitments like mortgage or loan repayments.
• Anyone whose occupation is specialised, which could make it difficult to find a new job quickly.
• Even if you don’t fall into one of these categories, redundancy insurance could provide much needed security in turbulent economies.

Income protection insurance is helpful for certain groups of people, including:

• People who are the main or only breadwinner for their families.
• Self-employed workers, freelancers, contractors and people with irregular income.
• Small business owners whose ability to work and earn is crucial.
• People with financial commitments or limited savings.

Whatever your circumstances, income protection insurance can be a valuable safeguard against a temporary loss of income.

Combining income protection and redundancy insurance

None of us expects to get so badly ill or injured that we have to take time off work for weeks or even months and lose the income we rely on. Neither do we expect to be made redundant. But these things happen, usually without warning. Sickness and redundancy are major causes of lost income.

Income protection and redundancy insurance give financial security in very different situations and there is no crossover, but by combining them you can cover most eventualities. Some insurers may offer the two as a package, but in most cases you’ll need to take out separate policies and by shopping around you may even find better deals.

Conclusion

Stories of mass redundancies tend to make the news, but often they happen on a much smaller scale. Whatever the size of the company you work for, no job is entirely immune to redundancy and the pay-off your employer gives you might not be enough to tide you over until you find work again. Redundancy insurance can cover you for up to a year, relieving the financial stress and leaving you free to focus your energies on finding the right new job.