Five minute guide to unemployment protection
When recession strikes there is one thing you can be certain of - rising unemployment.
While it is wise to have at least six months salary put aside should you be made redundant, it is always worth considering taking out unemployment cover to replace your income and help you meet the cost of your mortgage and everyday expenses.
This type of cover has recently become popular due to the rise in unemployment figures. It is available either as part of a payment protection insurance (PPI) policy or accident, sickness and unemployment cover. But it could equally be bought on its own or attached to other policies such as life cover or income protection insurance.
Buying unemployment cover is reasonably straightforward as there is a set price for everyone – unlike other types of insurance products where the cost of your premium would be set after assessing your age, gender, health and occupation.
However, it doesn’t come cheap. On its own, unemployment cover typically costs around £3 to £5 per month per £100 of monthly cover. So for example, if you want cover for £1,000 per month it would cost around £30 per month.
Cover typically will pay out after 30 days, so it’s important to make sure you’ve got enough money tucked away to survive for at least a month, and lasts for 12 months.
However, there are a few things to look out for before signing on the dotted line:
First of all, it is important to check your provider’s definition of ‘unemployment’ as that can vary from company to company.
This is particularly important if you’re self-employed as problems can arise if your business goes under.
You also need to make sure you buy cover before you know of any potential problems with your job. If you know you are going to lose your job and then buy cover, the chances are your provider will refuse to pay your claim.
Apart from this, unemployment cover is fairly easy to buy, and to find the best quotes simple go to one of the comparison websites such as moneysupermarket.com or moneyfacts.co.uk.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
Income protection insurance
If you can’t work in the event of sickness or illness, income protection insurance aims to give you an income, with the amount of income set by you up to 75% of your gross (before tax) income with the premiums varying by how much of your salary you want to cover, as well as your age and health and when you want to start receive any payouts. Any payouts from income protection insurance are tax-free and usually continue until you recover, reach your selected pension age or the period of cover specified in the policy comes to an end. Income protection insurance does not cover redundancy but you can buy it as a bolt-on.