What is redundancy insurance, and what does it cover? 

It’s difficult to consider what to do if you lose your job unexpectedly, especially if you have major financial commitments such as a mortgage or supporting your family and haven’t been able to build up an emergency savings pot. 

One insurance policy that may come in handy is redundancy insurance, but there’s much you should consider before seeking cover 

We reveal what redundancy insurance is, how it works, what it covers, the different types, and the pros and cons. 

What is redundancy insurance? 

Redundancy insurance, also referred to as unemployment insurance, is a type of short-term income protection policy that pays out a set amount for a specific number of months if you lose your job.  

So, you’ll get a tax-free monthly payment, usually up to 12 months, if you are made redundant. This payment is a percentage of your monthly gross income, meaning you can continue paying your bills and rent or mortgage while looking for your next role.  

How does redundancy insurance work? 

Like other insurance policies, you pay a monthly premium for redundancy insurance, although you must be employed full-time to buy a policy. 

If you’re made redundant while having this insurance policy (and don’t opt for voluntary redundancy), it will pay out if your application is successful.  

To claim, you must register as unemployed at a Jobcentre Plus and ensure your insurer has all the evidence and paperwork. 

Redundancy insurance policies payout between 50% and 70% of your gross annual salary. Typically, policies pay for up to 12 months, but the payout could be capped depending on your salary.  

You’ll have to wait for your deferred period – a set length of time that you’re unemployed - to end before you get your first payment, which you agree on when you initially get your policy.  

The deferred period tends to be at least 30 days, so you’ll need to be confident you can cover any expenses and bills during this period.  

There’s also the exclusion period, a set period when you won’t be able to claim on your policy, which could be up to six months from buying a policy. You won’t get any payouts if you’re made redundant during the exclusion period, and your policy will be voided. 

What is included and excluded with a redundancy insurance policy? 

Redundancy insurance should pay out a percentage of your monthly salary if you’re made redundant (and are not at fault), are forced to leave your job, or if the company goes into administration.  

However, there are exclusions, including: 

• Voluntary redundancy: This is where you volunteer to be made redundant, potentially due to incentives such as bigger redundancy pay or not having to work a notice period.  
• Resigning or being fired: In these scenarios, redundancy insurance won’t pay out. 
• If you know you’re at risk of redundancy: For example, if a company restructure is planned, you think your job is at risk and choose to get a policy, this won’t pay out. 
• You’re not a full-time employee: This means the self-employed, part-time employees and contractors are not covered by redundancy insurance.  

What are the different types of redundancy insurance? 

If you’re considering redundancy insurance, it’s worth understanding there are four types to choose from, including:  

• Mortgage payment protection insurance: This type of insurance is usually taken out with a mortgage to cover your mortgage payments if you lose your job. However, it won’t cover your income.  
• Payment protection insurance (PPI): This will cover specific debts, including credit card or loan payments, if you lose your job.  
• Accident, sickness, or unemployment insurance: This pays out a percentage of your income if you can’t work due to illness, injury, or compulsory redundancy. 
• Unemployment insurance: This would cover a percentage of your salary if you were made redundant. 

There are also other options, such as a standard income protection insurance policy or critical illness cover.  

As insurance policies can vary regarding what’s covered and excluded and costs, carefully consider what you want from your policy. A qualified insurance broker may be able to help you find the right policy based on your unique circumstances.  

How much does redundancy insurance cost? 

How much redundancy insurance will set you back depends on many factors, such as: 

• Your age: As you age, your premiums will be higher, especially if your policy is linked to your health. 
• Your cover: If you have a higher salary or want to cover a higher proportion of your income, your premiums will be more expensive. 
• Your deferred period: If you wait longer to receive your monthly payments, you’ll have cheaper premiums.
• Your benefit period: This is how long you’ll receive your monthly payments – the longer your benefit period, the more expensive your premiums will be.  

What to consider before buying redundancy insurance 

It’s worth considering whether redundancy insurance is right for you. For example, do you have a family who relies on you or significant financial commitments such as a mortgage or debt? 

If you don’t have a sustainable emergency savings pot to rely on, an existing income protection policy, or may struggle to find a new role quickly, redundancy insurance may be worth considering.  

Alternatively, there may have been some redundancies in your company, and while it might not be likely in the near future, redundancy insurance can offer peace of mind. 

You may also need to have been employed in your company for at least six months before buying redundancy insurance. As there’s may be a six-month exclusion period, this potentially increases the time between purchasing a policy and when you can use it to one year.  

What are the pros and cons of redundancy insurance? 

We’ll now explore the advantages and disadvantages of redundancy insurance. 

The pros of redundancy insurance 

• Up to 70% of your monthly salary is paid tax-free after the deferred period. 
• You’ll have time to find a new role without worrying about paying the bills, including your rent or mortgage. 
• You’ll receive the monthly payments until you get a new job or the benefit term ends, which is usually up to 12 months.  

The cons of redundancy insurance 

• You can’t claim if you knew you would be made redundant or it was a strong possibility. 
• You’ll not receive any payments until the deferred period ends, so you’ll need savings to tide you over, which may need to last at least a month.
• You won’t get any payments if you’re made redundant during the exclusion period, take voluntary redundancy, resign, or are fired.  
• You won’t be able to get redundancy insurance if you’re a contractor, self-employed, or work part-time.  

Need help finding the right insurance policy? 

It can be difficult to determine what insurance you should get to protect you and your loved ones. 

That’s why an insurance broker can be useful, as they can look at your unique circumstances and goals to find the right insurance policy.  

Unbiased can quickly match you with a qualified insurance broker who can search for the most suitable life insurance, income protection, or critical illness policy.