Unemployment insurance explained

What is unemployment and redundancy insurance?

Unemployment and redundancy insurance acts to offer a financial safety net should you be out of work. Income protection and ASU are the two main types of unemployment insurance, covering you if injury, illness, job loss or redundancy prevents you from earning.

ASU cover is a shorter-term policy (typically 12-24 months) that can offer broad cover with an easy underwriting process with decisions based on your claim. It's important to note, however, that ASU does not provide cover if you resign, take voluntary redundancy, or if you're fired from your job.

Income protection insurance can pay out a long-term monthly benefit (even up to retirement) but only covers injury and illness. It does not offer protection for redundancy or job loss, unlike ASU.

In addition to the financial protection element of unemployment insurance, some policies also offer access to health and legal support services.

How does accident, sickness and unemployment insurance work?

ASU can provide income protection cover if you're unable to work due to injury or illness or if you lose your job suddenly. This type of policy tends to offer short-term cover for up to 12 months, but you can also find longer financial protection for 2 years. For those looking for a broader unemployment insurance option, ASU can also cover involuntary redundancy and job loss.

An ASU policy can cover anywhere between 50% and 70% of your typical gross monthly income. It'll provide payments to help cover essential outgoings such as rent or mortgage repayments.

When searching for quotes, you'll be asked to set a 'deferred period'. This is also known as a waiting period and relates to the time between when a claim is made and when you begin receiving payments. Generally, setting a longer deferred period can lower what you pay in premiums.

ASU policies also include an 'exclusion period' that prevents you from claiming immediately after your policy begins up to a set duration (typically 60-180 days).

What does income protection insurance cover?

Income protection insurance offers long-term financial protection if an accident, illness or injury prevents you from working and earning your typical income.

Like ASU cover, it can pay out anywhere between 50% and 70% of your typical gross monthly salary. However, exact payouts can vary based on the insurer and policy you choose.

The long-term nature of income protection means that upon a successful claim you'll continue to receive payments until you return to work, begin another job, or retire. Unlike ASU, you'll generally need to complete a medical questionnaire and provide personal information during an income protection insurance application.

You'll also need to decide between income protection policies offering cover for 'own occupation', 'suited occupation' or 'any occupation'. These options refer to your incapacity and whether you can return to work or begin receiving claim payments.

How much does unemployment insurance cost?

There are no fixed premiums for unemployment insurance. What you pay will be calculated by taking into account your personal circumstances, the insurer you buy a policy with and the type of cover you opt for.

So, how do these factors affect what you pay?

• Your age and health: Naturally, as you get older, the probability of you sustaining an injury or suffering an illness increases. Because of this, your premium will reflect the risk. In addition, any pre-existing health conditions may increase what you pay - some insurers may exclude these conditions from your policy. Being a smoker can also raise the cost of unemployment insurance.
• Your occupation: Some jobs carry with them a greater risk of potential injury or illness, so your premiums may be adjusted accordingly.
• Your salary: Quite simply, what you typically earn and the extent of cover you require can have a huge impact on your premiums. Your potential payouts are based on a percentage of your monthly income (sometimes capped at a certain amount), so it's reflected in your premium.
• What policy you buy: Income protection policies are generally more expensive than ASU cover. The level of cover you settle on and the percentage of salary you'd like to cover play a major factor in calculating your premium.
• Your deferred period: You have the option to set the length of time between a successful claim and when you begin receiving payments. This could be a matter of weeks, months, or even a year. Selecting a longer deferred period can potentially reduce your premium.

To see what you might pay for unemployment insurance, try comparing quotes with Uswitch to find the cheapest and best-value policies based on your circumstances.

What are the alternatives to unemployment insurance?

Beyond unemployment and redundancy insurance, there are various options that could offer some form of financial protection and support:

• Savings or emergency fund: Having an emergency fund means you have some money available to tide you over financially until you return to work. However, it's entirely reliant on you saving enough money to pay for essential expenses for 3 to 6 months, or as long as you can afford.
• Government benefits: There are certain benefits available to you through the government if you're unable to work. You can also apply for Jobseeker's Allowance (JSA) if you're actively looking to find work or Universal Credit if you're eligible to help with living costs. These benefits can offer a degree of financial protection but only provide a basic level of support.
• Mortgage Payment Protection Insurance (MPPI): Similar to unemployment insurance in that it can offer financial support if you unexpectedly lose your job or suffer an injury or illness. However, MPPI only pays out to cover mortgage repayments without providing support for other living expenses.
• Critical illness cover: Although it's not directly linked to unemployment or redundancy, a critical illness policy can provide financial protection if you’re diagnosed with a serious illness or injury. This type of policy can pay out a pre-agreed lump sum if you’re injured or diagnosed with an illness that’s specified in your policy.
• Credit or borrowing: If you have a bank account, your provider may be able to offer an agreed overdraft or a personal loan until you're able to begin repayments. However, if you decide to borrow money through an overdraft, credit card or loan, it comes with inherent risk.

Borrowing can risk accumulating debt or even losing whatever the loan is secured against if you can't keep up repayments. In addition, you may also need to repay more than you initially borrowed in interest. That's why you should always seek financial advice and understand the risks before committing to borrowing.