Redundancy insurance

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

Insurance against redundancy 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 currently compare standalone policies for redundancy insurance at Compare the Market. However, you can compare quotes for different types of income protection insurance, which include unemployment cover.

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 payout is typically up to 65% or 70% of your gross (before tax) monthly income. However, providers might cap the total amount if you’re on a very high salary.

Here’s an example of how it works:

1. You’re employed and receive a gross annual income of £35,040.

2. You choose a redundancy insurance policy with a benefit amount of 65% of your gross monthly income.

3. You’re made redundant and make a claim with your insurance provider.

4. You remain unemployed for the two-month deferred period set by your provider.

5. Your claim is successful. You start to receive monthly payments of £1,898 – that’s 65% of your gross monthly income of £2,920.

6. You continue to receive monthly payments for 12 months or until you find work – whichever is sooner.

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)

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)

This cover 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

ASU insurance offers comprehensive protection if you’re unable to work because of illness or injury, or if 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 it won’t cover you if you’re unable to work because of illness or injury.

Does income protection insurance cover redundancy?

No, income protection doesn’t cover redundancy. It only covers you if you’re unable to work due to illness or injury.

Income protection won’t cover death either. However, you can set up a policy that provides your family with an ongoing monthly income if you die or are diagnosed with a terminal illness. This type of term life insurance is called Family Income Benefit (FIB).

If you’re concerned about redundancy, and how you would cope should it happen, added protection could be worth it for peace of mind.

The current redundancy rate is much lower than during the Covid-19 pandemic in 2020. However, there were still 114,000 redundancies recorded by the Office of National Statistics from October to December 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 for you:

• 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.

• You think you’d struggle to find work quickly if you lost your current job.

Redundancy insurance might not be worthwhile for you if:

• You’re a highly skilled worker who would likely find another job quickly with another employer.

• You have other skills that mean if you lost your current job, you could move quickly to a different line of work.

• You have enough savings to cover your 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.

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.

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.

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.