Does Income Protection Cover Redundancy?

When times are tough, the economy turns downward, or corporate profits demand reduced expenses, employees often suffer.

One of the most common ways to cut costs is to reduce the workforce; after all, salaries are expensive, benefits add up, and gig workers or overseas outsourcing cost less.

There are several different ways an employee can be released from employment. Termination, layoffs, and redundancy can all happen and have slightly different legal repercussions.

A commonly asked question is: does income protection cover redundancy?

What is Income Protection Insurance, and How Does it Work?

Income protection insurance is a similar product to life insurance, which is why we’re covering it here on Insurance Hero. It aims to replace between 50% and 70% of your income if you’re forced out of work.

However, the reason you are forced out of work must be health issues confirmed by a GP.

In other words, if you’re unable to work due to injury or illness and a GP can verify it, you can claim income protection insurance.

One significant difference between income protection insurance and more traditional forms of life insurance is that your payments will be monthly rather than a lump sum or an annuity.

This means you aren’t suddenly faced with the need to manage a large amount of money and ration it until it runs out. Instead, it simply replaces some portion of your income.

You can maintain a standard of living, though you will often have to tighten your belt to make ends meet until you can replace your income with another job.

Another key difference between income protection insurance and other forms of life insurance is that it isn’t a one-time payout.

You can maintain your policy and ongoing cover when you make a claim. When you return to work – if you return to work – and if you are then rendered unable to work again, you can make another claim.

Your policy may limit how many times you can claim in a given period, but that varies by cover.

Does Income Protection Insurance Cover Redundancy?

Bringing things back around, we ask the same question: Does income protection insurance cover you if you’re made redundant? Unfortunately, the answer is no.

Income protection insurance covers you if you cannot work due to injury or illness. On the other hand, it doesn’t cover you if you die (that’s regular life insurance), retire, or are laid off, terminated, or made redundant.

In short, it generally covers health-related reasons you’re no longer able to work.

Income protection insurance may also be more or less restrictive, depending on your insurance provider’s definition of incapacity. There are generally two primary options you’ll see:

• Own Occupation: This is if you’re rendered unable to do your job but could potentially do another job. For example, a construction worker could be injured and unable to perform construction tasks but could remain employed in a desk job until they recover; they could still claim income protection insurance, though the payout will generally be lower, commensurate with the salary they still draw.
• Any Occupation: This is if you’re unable to do any job. This is much stricter and requires you to be entirely unable to work. Moreover, some insurance providers maintain lists of low-activity jobs to use as a benchmark and may disqualify you because you can technically perform those jobs (even if those jobs aren’t available anywhere near you)

So, if income protection insurance won’t cover you after you’ve been made redundant, are there any insurance products that will? Fortunately, the answer is yes.

What is Redundancy Cover Insurance, and How Does it Work?

Instead of income protection insurance, you’re generally looking for redundancy cover. This insurance may also be called unemployment insurance.

• Redundancy insurance is designed to provide short-term income protection specifically for redundancy, not health-related issues.
• With this kind of cover, the same rules apply: you can claim if you’re made redundant, but not if you’re terminated or have health problems that prevent you from working.
• Redundancy insurance usually lasts up to 12 months. It can help replace your income while you look for new work.

However, there are a few significant limitations to redundancy insurance:

First, it won’t cover your full salary. You can generally insure up to about 70% of your income, though some policies will offer a lower amount for a correspondingly lower premium.

You must evaluate how much you’re willing to pay to insure your income against redundancy.

A second restriction is that redundancy insurance cover is often available only to people employed full-time by a UK firm.

If you’re employed part-time, a gig worker, work remotely, freelance, self-employed, or run your own small business, you won’t be eligible for redundancy insurance.

Depending on the policy, you may also lose cover if you’re dropped from full-time to part-time.

One of the most significant restrictions that catches many people off guard when shopping for redundancy insurance is that you usually have to wait a probation period before you can make a claim.

This is meant to prevent people from only signing up for cover when they know they’re about to be made redundant, making a claim immediately, and cancelling as soon as they no longer need it.

Exploiting it that way could leave insurance providers insolvent, so they often require a waiting period, such as 6 months or 1 year, before a policy can be claimed.

The final restriction is that redundancy insurance isn’t commonly sold as a stand-alone product.

So why are we mentioning it? Well, it’s a product that’s often bundled with other insurance types.

For example, if you buy income protection insurance, you might be able to bundle it with redundancy insurance.

You may also be able to get redundancy insurance as part of a life insurance policy or combined accident, sickness, and unemployment coverage.

This means that if you want income protection from both health issues and redundancy, you should proactively seek insurance cover as soon as possible and maintain it to ensure it’s there when you need to claim.

If you’re thinking, “What if I never need to claim it? Then I’m paying for insurance cover that I never use, and that’s just an additional expense,” you’re not wrong.

Then again, that’s how most forms of insurance work. You’re not buying results; you’re buying peace of mind while you go about your business, plus a fallback if the worst happens along the way.

Do You Need Redundancy Insurance Cover?

Whether you need redundancy insurance depends on your financial situation, employment status, and risk tolerance.

To determine whether redundancy insurance is worthwhile, consider two primary factors:

First, what are your expenses and obligations? You have bills, a mortgage or rent, other debts, and ongoing costs like food and petrol.

You may also have medical care, childcare, family-raising, and other expenses.

How do those expenses look in comparison to your income and to your savings?

Can you dial them back, cut summer camp and music lessons, take public transportation or bike instead of driving, or buy cheaper food products, or are you already living lean?

Second, review your current finances. Ignore income for the moment and consider whether you have an emergency fund. Do you have savings and investments?

How long can you maintain your standard of living if your income drops to zero? The bigger your buffer, the less income replacement you need from an insurance product.

On the other hand, the closer you are to nothing, living cheque to cheque, the more likely you are to need an income replacement product.

Finally, other sources of income replacement should be considered. For example, the government provides statutory redundancy pay, which is based on your employment history.

It’s not a lot of cover – you can read the details here – but it’s an additional layer of buffer to help keep you going while you seek new work.

Another thing to consider is that you may already have additional support from an existing insurance product.

Many people have life insurance that offers income protection and redundancy cover as add-on riders. Others have catastrophic coverage that may cover some redundancy or health issues, though it may not be much.

You may also have mortgage payment protection insurance (MPPI), which serves a similar purpose.

Instead of covering a set amount of your salary, it covers your mortgage payments, so if you lose your job for any reason and can no longer pay your mortgage, the insurance can step in and keep payments going for a time.

If, after evaluating these factors, you’re still in a precarious position, it’s probably a good idea to shop around for redundancy and related insurance products.

Our team are standing by to talk to you, or you can fill out a simple form to compare insurance quotes directly.

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