Latest jobless figures paint a worrying picture of rising unemployment and increased uncertainty. The public sector looks particularly vulnerable with experts warning job cuts could impact 725,000 jobs over the next five years. In light of the labour market outlook, Workingmums.co.uk has put together this guide on what to consider when buying unemployment insurance.
What is unemployment insurance?
Unemployment insurance is available regardless of profession and gives many workers peace of mind that they can meet their credit repayments should the axe fall. On the surface it is a simple product in that it pays out if you are made involuntarily redundant. But beware even the better policies come with exclusions, including limits on how much of your income and debts you can cover plus a hefty wait between taking the policy out and making a claim.
To make matters more stressful, Emma Walker, head of protection at price comparison website moneysupermarket.com, tells Workingmums.co.uk that unfortunately taking time to make your mind up doesn’t always pay. “Job security is of paramount importance but at a time when this is a luxury, it is important to think about your options,’’ she says. ‘’The best time to buy a protection policy is when you least expect to need it, however, unfortunately it may be too late for many people.”
The general advice is that it is possible to purchase unemployment insurance as long as your employer hasn’t made any announcements on job cuts but there is a fine line between knowing that you might be at risk of redundancy and the actual news being communicated.
Emma says: "For those employed in industries at risk of redundancy, looking for any kind of protection insurance at this time may not be the best option as a claim may not be fulfilled if you think you might already be at risk of losing your job. Many of us will be feeling insecure about our jobs at the moment, so it’s important to have safeguards in place to cover your income against any unplanned unemployment well in advance, and make sure you're in the strongest possible position if job cuts are made.”
Matt Morris, spokesperson for insurance specialist LifeSearch, says the position for public sector workers continues to be unclear. “It does seem to be more difficult to cover those in the public sector, but insurers say they have no official line on what client occupations they will accept and which ones they won’t – they judge it on an individual basis,’’ he says.
“Our experience suggests they were previously very hard on the banking sector and now they seem to be very concerned about the public sector, although officially they are saying this isn’t the case.”
What to consider when buying protection:
Once you’ve made the decision to get some cover, shopping around is crucial. Matt offers five top tips to consider before taking out your unemployment insurance:
1. Don’t buy with Payment Protection Insurance (PPI)
It is important, particularly in the current economic climate when people are worried about job security, that consumers are not led into believing that they have to buy PPI to get unemployment cover. Unemployment cover can be bought stand alone or as an addition to a policy like Income Protection.
2. Qualifying period
This is the period of time between the policy starting and the earliest point the holder is allowed to start claiming. If the client finds out they will be made redundant in this period they cannot claim. Consumers want this to be as short as possible so that they have as much opportunity as possible to claim.
3. Don’t wait
Once consumers have specific knowledge that they are going to be made redundant they cannot take out a policy. Also, if it is left too late to take out a policy and they are made redundant before the qualifying period, they would not get paid. So anyone who is concerned should make enquiries as soon as possible.
4. Deferred period
This is the period between when a person starts claiming and the time they start being paid. Some policies will backdate this. The shorter the deferment period the more expensive the policy, but the quicker policyholders can get paid.
5. Maximum benefit
Don’t take out more than the maximum that is allowed. If a policyholder asks for more the premiums will be higher, but they will not receive any money above the policy’s maximum benefits, so consumers should make sure they know what’s allowed.
If you’re buying unemployment insurance, it’s a good idea to get independent financial advice first and then to compare several different policies. Also, check what your employer would offer if you are made redundant so you are fully aware of the whole financial picture should you lose your job.
A common form of unemployment insurance is mortgage payment protection insurance (MPPI) cover, which is otherwise known as accident sickness and unemployment (ASU) but obviously only applies if you have a mortgage. This type of policy will typically cover your mortgage for up to 12 months if you are unable to work due to illness or unemployment. Emma says that last year and for the latter part of 2008 there were significant hikes in some premiums for MPPI – largely due to an increase in claims as a result of the economic climate. In some cases, Emma says she saw customers cancelling their policies because they simply became unaffordable. To add to this, says Emma, "We have seen a rise in the amount of complaints regarding mis-selling of ASU (which includes MPPI) and premiums being refunded if this was found to be the case.”
Thankfully in these cases the Financial Service Authority has stepped in and awarded penalties to those companies who did not treat their customers correctly, and Emma says that all this shouldn’t put employees off purchasing MPPI.
"My advice is to shop around and get advice if you are unsure. Remember that MPPI is only designed for someone with a mortgage so ask yourself these questions: How much is my monthly mortgage repayment? If I was unable to work how long could I manage before needing a policy to kick in and do I need additional cover for mortgage related bills?" Emma says it’s important not only to compare prices but also policy features – in particular eligibility, definitions around occupation and time in employment as well as definitions around pre-existing medical conditions. Again, Emma says that if you are aware of pending unemployment this won’t normally be covered – usually you must hold the policy for at least six months before you can make a claim.
For people looking for more comprehensive cover than ASU policies can offer, an income protection policy may be worth considering. This type of policy will cover you if you are unable to work because of illness or injury up to the age of 65. While income protection plans won’t pay out if you lose your job, you can often take out unemployment cover as an add-on, and this will increase the cost of premiums by around £20 a month.
What kind of premiums can I expect to pay?
Based on a 30-year-old female looking for £1000 cover, with a 30 day excess and a 12-month period on an ASU cover policy, you can expect to pay the following (figures are based on comparisons from Moneysupermarket):
- Protection UK monthly premium £19.40
- I:protect Insurance £23.70
- Helpucover.co.uk £28.80
- Mortgageprotect £30
- Getmy.com £33.40
The figures equate to a £14 difference between the most expensive and the least expensive, highlighting just why it is so important to shop around and understand what you are buying.
Good luck and remember to read the small-print!