Redundancy Protection Insurance: Who needs it?

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Redundancy protection insurance is also known as income protection or unemployment cover. Unlike other types of insurance which people consider essential protections against life’s ups and downs, redundancy protection insurance is often ignored by working people despite the fact that every year in the UK over one million people find themselves made redundant. 

Income protection is designed to insure you against this risk and provide you with a way of covering your bills in the event that your business is forced to make workers redundant and you are without a wage for a time. 

It is not for everyone, but ask yourself, if you were to lose your job tomorrow, would you be able to live off your savings? And if so, for how long?  If you don’t have savings, are you sure you could find a job that paid you just as well or better immediately? These are the types of questions you need to ask yourself when trying to make a decision on whether or not you need to have redundancy protection insurance or not. 

Sometimes redundancy can come out of the blue. Whether you are prepared for it or not, you need to be sure that you could continue to pay your bills and honour your financial commitments without your wage coming in.

What is it exactly?

Redundancy protection insurance is a long-term policy that is designed to help you out when you are unable to work and earn a living. The policy ensures that you continue to receive a portion of your income until you find new employment or retire.

It should not be confused with critical illness insurance that takes effect when you are unable to work due to illness and usually pays out one lump sum amount.

So, do you really need it?

The answer to this question depends on a number of different factors. To answer the question of whether you need redundancy protection insurance or not, we need to look at who it might benefit and in what circumstances you might not need to take the insurance cover out.

Who doesn’t need this policy?

You may not need redundancy protection insurance if, in the event you are made redundant:

  • You are able to survive on government benefits

The welfare state provides a safety net for those times in life – such as when you are made redundant – when you require a helping hand to get by until your personal circumstances improve.

This should provide some reassurance to you at a time of uncertainty and worry. However, government benefits are not designed to be a long term solution for most and as such, the benefits you would be entitled to in the event you are made redundant, would most likely represent a significant drop in your usual incoming. 

If you are confident you would be able to survive perfectly well, meeting all your financial commitments and without any difficult drop in your usual standard of living, on the amount of money you would be entitled to from the government while you search for a new job, then you probably do not need redundancy protection insurance. However, there are not many of us that could say that with certainty. 

Redundancy protection insurance takes into consideration how much you are currently earning, and the amount of money you need to spend on bills when it is calculated. This is done to ensure that even if you are made redundant, you will not suffer any significant drop in your standard of living. The government does not consider this. Benefits are one flat rate, no matter what you were previously earning.

  • You have enough savings

If you have savings, you may be able to afford all of your bills for a while after you are made redundant, but given that it is not possible to know how long it might take you to find another job, you need to be sure that you have enough savings to cover the cost of living for some months in order not to need to rely on a redundancy protection insurance.

  • You are able to take early retirement

In this case, you will not need redundancy protection insurance but you need to be sure that this would be an option that was open to you, and it is hard to guarantee this if you do not know at what point in the future redundancy might be a possibility.

It also depends on your age as early retirement is unlikely if you are a long way from retirement age. 

  • If you own the company

If the company belongs to you, you are not going to make yourself redundant. However there are other dangers attached to losing your job if your own company folds, which it is a good idea to have some protection against.

Other insurance policies may be better suited to you in these circumstances. 

  • If you have an alternative source of income

Careful people always try to hedge their bets. This could mean having savings or ISAs put by as ‘contingency funds’ for emergencies.

For others, this means having more than one source of income with a second job or self-employed sideline. However, for many people, these ways of ensuring not all of your eggs are kept in one basket, are not possible.

With living expenses as high as they are, and time pressures so tight, the possibility of putting money aside every month, or taking a second job, just doesn’t exist for a lot of people. Those extra sources of income which others might be able to rely on in the event that you are made redundant, aren’t there to help you pay your monthly bills. In which case, having an insurance plan set up is important. You will therefore still remain financially stable even after you are made redundant at work. 

  • If you can be supported by a partner or your family

If the money you earn through your job isn’t necessary to keep your household budget ticking over, or you have a partner or family who you are sure would be willing and able to support you at a time you weren’t able to earn for yourself, then you may not need an insurance policy.

However, if you cannot be sure how long they would be able to continue supporting you, while you looked for new employment, you may still want to consider taking out your own insurance policy. 

How much does income protection cost?

The amount of money you will be required to pay each month in the form of premiums, depends on the type of policy you choose and your current circumstances. The cost will depend on factors such as;

  • Your age

Statistics show that the older you are, the higher your chances are of being made redundant at work. Sadly, companies are always looking for ways to cut costs and younger employees tend to be cheaper than older, more experienced ones.

Re-entering the jobs market at an older age also becomes more difficult as employers presume you are not as up to date on the latest advances and technology.

If you work in a job that requires you to be physically fit, employers may also be reluctant to take on employees who are older, fearing that they are not as capable of doing the job as well as younger workers.  Therefore premiums will be higher for this type of insurance, if you are older.

  • Your job

The kind of job you do greatly determines the amount of money you will be required to pay in terms of premiums. For example, if you work in the construction industry, you will not pay the same premiums as an office worker. This is because construction work is much more difficult to do at an older age and if you are not physically fit, and therefore it carries a greater risk of you being made redundant than an office worker. 

Similarly, the amount of money you earn per month also determines the cost of your premiums.

  • The waiting period before it pays out

The length of time you can afford to wait before your policy starts to pay out is also extremely important.

If you are able to afford to live off your savings for the first six weeks of redundancy, then you can lower your premiums to reflect this. The longer the deferment period is, the lower your premiums will be. 

Conclusion

Sometimes redundancy can come out of the blue. Whether you are prepared for it or not, you need to be sure that you could continue to pay your bills and honour your financial commitments without your wage coming in.

Redundancy protection insurance can provide a vital source of income in the event that you are without work and struggling for money.

If you have a family, or you are the main breadwinner, then having an insurance policy that can cover your expenses should be a priority. If you have large savings or your wage is not vital to the household budget then you can afford to be without it. Whether you have savings or not, no-one can be sure how long they may be out of work if made redundant, and the older you are, the harder you may find it to be re-employed.

It is always better to be safe than sorry, which makes redundancy insurance a sensible option for most working people.

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