What is unemployment insurance?
Unemployment insurance is a form of income protection that pays out if you become unable to work. This type of policy is often bundled with accident and sickness insurance.
How does unemployment insurance work?
If you’ve bought an unemployment insurance policy and you lose your job, you’ll be paid a tax-free monthly income that starts after you’ve been off work for a pre-agreed waiting period. This is sometimes called the deferred period. The longer this period is, the lower your premium – so it’s worth looking at a couple of options. If you choose a longer waiting period, make sure you can manage while you wait for your pay-outs to start.
You won’t be able to claim on your policy as soon as you take it out. There’ll be an exclusion period, which you can decide on, dependant on your needs. This protects the insurance provider from people taking out policies when they know they’re going to be made redundant.
What types of unemployment cover are there?
There’s only one type of unemployment cover, but the benefits and protection offered, as well as how much they pay out, can vary among providers - so it’s worth shopping around to find cover that fits your circumstances. An unemployment policy will usually pay out for 12 months.
Who needs unemployment insurance?
If you’re an employed worker, no matter how secure you may feel your position is, there’s always the possibility of losing your job. If you don’t have a large pot of savings to rely on, unemployment insurance could provide a vital safety net.
It’s important to think about how you’d manage if you or your partner lost your job. It could be particularly useful to have unemployment assistance if:
- You have a mortgage, loan or other debts to pay
- You have children to support
- You don’t have enough savings to draw on until you find another job
Even if you have money set aside, you could find it dries up pretty quickly when it’s being used to pay for your monthly outgoings, food shopping and bills.
If you think unemployment insurance is right for you, check the eligibility requirements, as they can vary among insurance providers. Many require you to be in employment with the same employer for a minimum of 12 months before you can buy a policy.
Advantages of unemployment insurance
- A tax-free monthly income if you’re made redundant
- Monthly pay-outs can be 50-60% of your monthly salary
- Provides a financial safety net until you find another job
- Can be bundled with accident and sickness insurance to offer even more protection
Disadvantages of unemployment insurance
- It’s only designed for forced redundancy – you can’t claim if you’re fired, quit your job or take voluntary redundancy
- It won’t pay out if you were aware of upcoming redundancies when you took out the policy
- You can only start claiming after an exclusion period
- It might not be available to the self-employed or company directors, who have more control over their own employment
How much is unemployment insurance?
The cost of unemployment insurance is different for everyone, as it depends on your own circumstances and the options you choose. The amount you’ll pay for your premiums boils down to:
- Level of cover –the higher the percentage of salary you want covered, the more you’ll pay for your premiums. So if you can manage on 50% of your salary, there’s no need to pay extra for a premium that covers more than this.
- Length of deferred period – the longer your agreed waiting period before payments start, the cheaper your premium will be.
Alternatives to unemployment cover
Unemployment cover is just one type of income protection available. Other types of protection that can cover your income include:
- Critical illness cover – provides you with an alternative income if you’re unable to work because of a serious injury or illness that your policy covers.
- Accident, sickness and unemployment cover (ASU) – a more comprehensive policy that covers unemployment as well as sickness or injury for up to 12 months.
- Mortgage payment protection (MPPI) – specifically designed to cover your mortgage repayments for up to a year if you lose your job or become unwell.
Unemployment benefits and unemployment insurance
If you lose your job through no fault of your own, you may be eligible for Universal Credit. This Government benefit can help with living costs while you’re out of work. However, it’s unlikely to be enough to make up for a loss in salary. Also bear in mind that Universal Credit is means-tested, so the amount you receive could be affected by your unemployment insurance pay-outs or any savings you may have.
If you’ve been working in the same job for more than two years, you’ll also be entitled to statutory redundancy pay. For each full year you’ve worked for your employer, you should get:
- Up to age 22: half a week’s pay
- Age 22-41: one week’s pay
- Age 41 and older: one-and-a-half week’s pay
Statutory redundancy pay only lasts for the length of time you’ve worked for your employer. However, this is capped at 20 years length of service.
The maximum weekly pay you can get is £544, even if your previous salary was more than that. Again, this may not be enough to cover all of your living costs.
Unemployment insurance could cover the gap between your unemployment benefits and your previous salary. Or, if you can manage on benefits alone, you could organise for your policy to kick in once your statutory redundancy pay comes to an end.
Frequently asked questions
How has the coronavirus pandemic affected unemployment insurance policies?
If you took out your unemployment insurance before the COVID-19 pandemic began, you should still be protected and able to make a claim. Just make sure you check your policy wording carefully, looking for any exclusions listed.
How do payouts work?
After the deferred period specified in your policy, your insurance provider should credit you for any income missed during this period. From then on, you’ll receive monthly tax-free pay-outs.
The monthly pay-outs are normally an agreed percentage of your income – often between 50% and 60% of your monthly salary.
Alternatively, insurance providers may pay out a certain percentage on part of your income and a different percentage on the rest.
How much of my income can I cover?
Unemployment insurance typically pays out a percentage of your income – usually between 50% to 60% of your monthly salary. Depending on your insurance provider, you may be able to receive a higher percentage of your salary up to a certain amount – say £50,000 – then a lower percentage on anything above that.
It’s very unlikely that you’ll be able to cover 100% of your income, so you may need to top up with savings or tighten your belt until you’re earning again.
How soon will I get my unemployment insurance pay-outs?
If your claim is successful, you’ll begin to receive payments as soon as the agreed deferred period has ended. The monthly payments will continue up until you find another job or when the claims period comes to an end.
Am I eligible for unemployment insurance?
You can buy unemployment insurance if you’re either full-time employed or you work part-time for at least 16 hours a week.
Can I get unemployment insurance if I’m self-employed?
If you’re self-employed, you can buy unemployment insurance, but the circumstances in which you can claim are quite different from those of employees.
You can’t buy unemployment insurance online from us if you’re self-employed, but it’s worth speaking to an adviser if you’re considering this type of cover.
Are there any exclusions I should look out for?
Unemployment cover usually stipulates an exclusion period from the date you first take out your policy, during which time you won’t be able to make a claim. This is to stop people taking out a policy if they find out they’re likely to be made redundant soon. The length of the exclusion period varies among policies but is typically between 90 and 120 days.
Unemployment insurance doesn’t cover you if you quit your job or get fired due to misconduct, fraud or dishonesty. You also won’t be able to claim if you accept a voluntary redundancy package.
If you’re thinking of buying accident, sickness and unemployment cover, it’s worth checking if it will cover you for any pre-existing medical conditions. Some policies might not. To that end, it’s also important to be completely honest when taking out cover. Insurance providers are unlikely to pay out if they believe you withheld or falsified information when taking out your policy.
What do I need to think about when comparing unemployment insurance?
If you’re thinking about buying this kind of policy, you’ll need to think about the level of cover you’d need. Consider whether you need to protect:
- your mortgage
- loan or debt repayments
- your wages.
If you’re an employee, your employer may already provide some cover against accidents and illness. Find out what you’d receive if you were to be made redundant, so you know roughly how long you could last before needing some financial help.
Do I need life insurance too?
Many people who buy unemployment insurance also buy life insurance. This product is designed to provide a large sum of money to your partner and/or children if you were to die.
How can I compare unemployment insurance?
It’s easy with our comparison service. Just fill in a few details about yourself and whether you’re interested in covering your mortgage or your income. We’ll then list your quotes in price order, with the cheapest at the top.
Price is a big consideration, but it’s important to make sure you get the level of cover you need too. By comparing a range of quotes, you’ll find the protection that’s right for you at a price that works with your budget.
What do I need to get a quote?
When you start an unemployment insurance quote with us, try to have the following information to hand so we can match the right deals to your circumstances:
- details of your income
- details of your current employment
- the length of cover needed
- details of what you would like to cover, eg your mortgage payments, bills etc.
“Many of us don’t have the luxury of a financial cushion to fall back on if we find ourselves unable to work. With unemployment insurance, you can get a monthly income to help you pay the bills if you lose your job - to keep you, and your family, on your feet.”
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 Correct as of June 2023.
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