Unemployment cover to protect your finances

Many people have experienced the trauma of unemployment. Even if they haven’t, they very probably have had cause to worry at times about the possibility of unemployment and what the absence of regular income would mean for them and their family.

Although many organisations are sympathetic to a change in personal circumstances and will make some allowances for such things, the harsh reality is that mortgage, heating, electricity, car, credit card and food costs do not just disappear in the unfortunate event of redundancy.

The insurance marketplace offers a range of insurance products aimed at this eventuality – policies that help people cope with a loss of income. Even when they are in regular and theoretically safe employment, many people feel more relaxed in their normal day-to-day lives knowing that they have such cover in place.

Depending upon personal circumstances and even luck, it could be beneficial to have this kind of cover in place to cope with the unexpected.

Payment protection insurance (or PPI for short) is a generic name for a product that protects your finances in the event of you becoming unable to work due to incapacity (accident or sickness) or involuntary redundancy.

You can choose to protect against the financial fallout of either of these events (ie accident, sickness and unemployment – also known as ASU insurance); incapacity cover only; or unemployment cover only.

With all these variants of cover, you will typically receive a tax-free regular monthly income that will help you keep your head above water financially should the unexpected happen.

You can get debt specific payment protection insurance policies that help to meet the cost of loan or mortgage repayments (known as loan payment protection insurance and mortgage payment protection insurance respectively).

These types of insurance are linked to a given expense such as a policy that will continue to pay car instalments in the event of income being lost. Many PPI policies will pay the funds directly to the company that owns the debt such as the policyholder’s car finance company or furniture HP company etc. Some PPIs are sold at the same time that the car or furniture is purchased or a credit card opened.

Or you can get a general income to be used for whatever purpose you wish, called income payment protection insurance.

General-purpose unemployment insurance can be expensive if bought directly from a lender. However, a good deal can often be sourced from a standalone provider.

When buying unemployment cover, do note that there are exclusions so it may not be freely available to all applicants. Typically you will need to have been in full time regular employment for at least six months.

Some careers or industry sectors may be seen as volatile with a high risk of redundancy. The over 50s may also be deemed to be at higher risk of redundancy that those under 50. In such cases the insurance premiums payable may be significantly higher than normal. Again, using a standalone provider may help get a low cost solution.

Applicants, who have a fragmented or missing recent employment record, in part time employment, working overseas or in some types of self-employed occupation, may find it difficult or very expensive to obtain this type of insurance.

Typically unemployment insurance policies will have a limitation upon the maximum amount they will pay and over what period. As an example they may only cover up to a maximum of 50% of normal monthly income. They may also have a ‘qualification period’ that prohibits claims for the first 6 or 12 months after opening the policy. Some may only commence payments 30-90 days after redundancy and many will not offer this type of cover at all if the policyholder already has a similar policy in place with another company.

Finally, in terms of cover and claims, in general an unemployment cover policy will not pay out in cases of voluntary redundancy or resignation. Some may have exclusions relating to dismissal in general or dismissal for certain categories of reason such as criminal behaviour.

When a claim is lodged, to prevent fraud they will also ask to see all copies of key documents from the employer including the statutory notice of redundancy to examine all dates, payments and reasons.

In summary these insurance policies may be of value but the details and conditions of the policy must be closely examined to ensure that there is a good match to the policyholder’s needs.

• Unemployment Insurance typically provides monthly income in the event of some types of loss of income due to unemployment.
• Unemployment insurance may be advantageous but it can be expensive when bought from high street banks and lenders and not always available to all.
• Insurance companies will only meet claims where the unemployment is deemed to have arisen for reasons beyond the policyholder’s control.