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Redundancy insurance

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What is redundancy insurance?

Redundancy insurance, often called unemployment insurance, is a form of income protection that can pay out if you lose your job unexpectedly.

It provides a tax-free monthly payment that could continue for up to 12 months – or sometimes longer – to cover a percentage of your gross monthly income while you look for a new job.

This allows you to continue paying your mortgage and making income or loan repayments. It’s a way of reducing the risks of getting into debt and avoiding the stress that this could bring.

We don’t compare standalone policies for redundancy insurance at Compare the Market, but you can compare quotes for different types of income protection insurance, which include unemployment cover.

How does redundancy insurance work?

You’ll pay monthly premiums, and if you’re made redundant involuntarily during this time you can make a claim.

To make a claim, you’ll need to register at a Jobcentre Plus and start a claim for Universal Credit or Jobseeker’s Allowance. You can then submit the relevant paperwork and evidence to your insurance provider so they can assess your claim.

If your claim is successful, you’ll receive a tax-free payment each month until you find other employment or until the policy term ends. However, you’ll typically have to be unemployed for a set length of time before you receive a payout – this is known as the ‘deferred period’.

Most policies offer cover for an unemployment period of up to 12 months. The pay-out is typically up to 65% or 70% of your gross monthly income (before tax). However, providers might cap the total amount if you’re on a higher scale salary.

Here’s an example of how it works:

You’re employed and receive a gross annual income of £35,040.
You choose a redundancy insurance policy with a benefit amount of 65% of your gross monthly income.
You’re made redundant and make a claim with your insurance provider.
You remain unemployed for the two-month deferred period set by your provider.
Your claim is successful. You start to receive monthly payments of £1,898 – that’s 65% of your gross monthly income of £2,920.
You continue to receive monthly payments for 12 months or until you find work – whichever is sooner.

What types of insurance are available if I lose my job?

There are different types of redundancy insurance, all of which typically pay out for a fixed period of 12 months.

Mortgage payment protection insurance (MPPI) is often taken out with a mortgage. It generally covers mortgage or loan repayments, not your income.
Payment protection insurance (PPI) is designed to cover specific debts such as a loan or credit card payments. It’s been well-documented that PPI was mis-sold in the past, but it could still be worthwhile if you’re worried about being unable to work.
Accident, sickness and unemployment (ASU) insurance offers comprehensive protection if you’re unable to work because of illness or injury, or you’re made redundant.
Short-term unemployment insurance is a standalone policy that could cover a proportion of your salary if you were made redundant, but not if you were unable to work because of illness and injury.

What does redundancy insurance cover?

Redundancy insurance is designed to cover a portion of your salary if you unexpectedly lose your job through no fault of your own. It covers you for compulsory redundancy – also known as involuntary redundancy – as well as the company going into administration.

What isn’t covered by redundancy insurance?

Redundancy insurance won’t cover you if you take voluntary redundancy or are given the sack.

You also won’t be covered if you deliberately take out a redundancy policy knowing you’re about to be made redundant, or that the company were planning to restructure and your job was at risk.

Some redundancy insurance policies won’t cover you if you work part-time – for example, less than 16 hours a week. And finding cover can be difficult if you’re self-employed or on a temporary contract.

If you have redundancy insurance as part of an ASU policy, you might not be covered for all medical conditions. Your insurance provider will also want to know about your medical history.

Make sure you read the terms of your policy carefully to ensure you’re getting the cover you need.

When should I consider buying redundancy insurance?

Although the current redundancy rate is much lower than during the Covid-19 pandemic in 2020, there were still 98,000 redundancies recorded by the Office of National Statistics in February to April 2024.

No job is guaranteed for life or completely secure, so income protection insurance needs to be considered on a ‘what if’ basis. But there are some situations that might make redundancy insurance more of a priority:

Your company is laying people off but redundancy looks unlikely in the near future. Many policies have an exclusion period of three to six months before you’re allowed to make a claim.
You don’t have a lot of savings but you can cover yourself during the deferred period before the first insurance payment starts. This is likely to be a minimum of a month.
You have a mortgage, loan or other debts to pay off.
You have a family to support.
If you think you’d struggle to find work quickly if you lost your current job, perhaps because you work in an industry that has seen a lot of redundancies lately.

You probably won’t be eligible to buy redundancy protection insurance, or make a successful claim, if:

You already know your job is at risk.
You’re taking voluntary redundancy or you’ve been fired, dismissed for misconduct, or you’ve chosen to leave your job.
Your employer offers you an alternative role and you turn it down without a good reason.
You’re self-employed, work part-time or you’re on a temporary contract.
You’re a company director.

Redundancy insurance may also not be worthwhile for you if:

You’re a highly skilled worker that would likely find another job quickly with another employer.
You have other skills that mean if you lose your current job, you could move quickly to a different line of work.
You have enough savings to cover the bills while you look for a new job.
You already have another form of income protection cover in place.
You’ve been with your current employer for a long time and you’ve calculated that the statutory redundancy pay you could receive would be enough to tide you over till you find a new job.

What is the difference between a deferred period and an exclusion period?

The deferred period is the time from when you’re made redundant to when payments start. It’s usually a minimum of 30 days.

You can choose to defer your payments for longer. This could help reduce the cost of your premium. It’s worth considering if you have savings to fall back on and are able to cover the gap.

The exclusion period is an agreed initial timeframe in which you won’t be able to claim. If, at the start of your policy, you have a six-month exclusion period, you won’t be eligible for any pay-outs during that time.

The point of an exclusion period is to stop people from taking out a new policy when they know they’re going to be made redundant.

How much is redundancy insurance?

The cost of redundancy cover varies among providers and depends on a number of things, including:

Cover level – the higher the percentage of your salary you want to insure, and the higher your salary, the more expensive your premiums will be.
Benefit period – you choose how long you want payments to last. This is typically 12 months but could be as much as 18 or 24 months. The longer the cover period, the more expensive your cover will be.
Deferred period – your premiums will be cheaper if you can agree to wait longer before receiving payments.

What do I need to get a quote?

We don’t compare standalone unemployment insurance cover, but we do compare quotes for other types of income protection insurance, including those that cover unemployment.

You don’t need any documents to get a quote. We’ll just ask you to answer a few questions covering:

Your name, age and address
What you do for a living
Whether you’re employed or self-employed
How much you earn a year
Whether you’re a homeowner
Whether you smoke or use nicotine-based products
Your chosen deferred period
The amount of cover you want, based on your monthly income
When you’d like the cover to start.

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Frequently asked questions

What are the pros and cons of taking voluntary redundancy?

The pros and cons of voluntary redundancy include:

Benefits:

You may receive more money than you’d get with ‘involuntary’ redundancy
It’s up to you whether to accept voluntary redundancy or not
It can give you more time to prepare financially before leaving your job.

Drawbacks:

If you don’t accept, you could face involuntary redundancy further down the line with a less favourable redundancy package
Redundancy insurance doesn’t cover voluntary redundancy
If you have a mortgage protection policy, it may not cover voluntary redundancy.

Is there any government help if I’m made redundant?

You might have certain rights as an employee if you lose your job, depending on the kind of work you do, where you work and how long you’ve worked there.

You could be entitled to:

A notice period
Redundancy pay
Time off to find a new job
The option to move to a different role
A consultation with your employer.

You’ll also have specific rights if you’ve been made redundant because your employer is insolvent.

For more about your redundancy rights, visit GOV.UK.

If you think you’re being unfairly dismissed, get in touch with the Citizen’s Advice Bureau.

Do you pay national insurance on redundancy pay?

Any payments you receive through a redundancy protection policy are tax-free. Statutory redundancy pay under £30,000 is also non-taxable.

However, if you get a termination payment when you leave a job, some of the money you receive might be considered earnings. This means you’ll have to pay tax and National Insurance on them.

This includes:

Unpaid wages
Holiday pay
Bonuses
Payments made during gardening leave.

Find out more about your redundancy rights at GOV.UK.

How much statutory redundancy pay will I get?

How much statutory redundancy pay you could get depends on your age, your weekly pay and how many years you’ve been in your job (capped at 20 years).

Bear in mind that you’ll only qualify for statutory redundancy pay if you’ve worked for your employer for at least two years.

Calculate your statutory redundancy pay at GOV.UK.

If you live in Ireland, you'll need to use the GOV.IE redundancy calculator instead.

How long does it take to get redundancy pay from the National Insurance fund?

If you’re entitled to statutory redundancy pay, you should receive payment from your employer on the date you leave work, or on an agreed date soon after.

Your employer must tell you in writing how your redundancy pay was calculated and when you’ll get your payment.

They should pay you in the same way they paid your wages – for example, into your bank account.

Does income protection pay out if I die?

No, the aim of income protection is to support you until you return to work or reach retirement age, whichever comes first. To provide support for your loved ones after you die, you need life insurance.

Why use Compare the Market?

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^[1] Correct as of September 2024.

^[2] As of October 1st 2024, Compare the Market had an average rating of 4.8 out of 5 from 52,401 people who left a review on Trustpilot. The score 4.8 corresponds to the Star Label ‘Excellent’.

What our expert says...

“Redundancy brings with it many worries, but the right protection can give you the peace of mind that you’ll still be able to pay your bills if you lose your job.”

- Tim Knighton, Life, health and income protection insurance expert