Cover Redundancy Explained

At the time of writing (September 2008) the UK is going through what the Governor of the Bank of England has a called an “extremely difficult” * period, families’ attention is likely to turn ever more towards the regular household bills and general outgoings which could further increase and become more difficult to meet. However, with economic downturns come job losses on some level, although exactly how many could end up out of work is hard to predict. This is when more of us are more likely to be thinking of ways in which we could cover redundancy should we be handed the dreaded envelope.

Although apparently secure in times of plenty, jobs can quickly appear much more unsteady in times of economic uncertainty or outright recession. A job is also the only way in which the vast majority of people are able to meet the regular costs of living, which can include a vital mortgages, rent payments and food and energy bills.

While some people have savings they can turn to in the event of a crisis, few consumers have thousands of pounds they could use to prop them up in the event of suddenly being out of work through no fault of their own. This is when an insurance policy which can cover redundancy can prove a lifeline.

Redundancy insurance is often a feature or service provided by a payment protection insurance policy, although many providers can offer specialist products which will only pay out in the event of being made redundant. A generic payment protection policy will give a person a regular lump sum if they are suddenly unable to meet regular payments through falling ill, being injured or generally ending up without an income through no fault of their own.

Cover Redundancy from Burgesses

So why consider a policy which will cover redundancy? Some industries can be more at risk than others when the crunch begins to bite. A person may feel their employer is particularly at risk of having to make cuts and decide they need a safety net, just in case. Others may find a general payment or income protection policy is simply too broad or too expensive.

Arguably, now in particular is the time to start thinking about covering that vital income. According to the Times, the number of unfilled vacancies in the three months to July 2008 fell to 634,900, 47,000 less than the previous three months**. This signifies people are quickly snapping up what jobs are available, while the same paper warns redundancies are rising, up by 14,000 to 126,000 in the three months to June.

Besides these sorts of figures are the concerns anyone must face if their services are no longer required by an employer. Of course, they should get a redundancy package which will help them in the short-term while trying to find alternative work. The amount you get will depend on how old you are and how long you have worked for your employer. Then attention will turn to hard-earned savings and finally, for many people, to the state system. The consequences to a loss of income through redundancy are clear. Failure to meet mortgage repayments can end in repossession and unpaid bills can end up in the hands of debt collectors.

It is also worth bearing the realities of the state system in mind. Britain’s provisos for the unemployed seeking work are not overly generous. Currently, Job seekers’ allowance stretches to little more than £60 per week in most cases, highly unlikely to be enough to cover the regular outgoings of the average person. Paid by the Department for Work and Pensions, the benefit can only be claimed after going through a complex application process. Remember it is also generally only available to people between the ages of 16 and 60.

After all of the regular options are exhausted, an insurance policy is one clear and sensible way of protecting against the unwanted redundancy letter. A provider will require the policyholder to make a successful claim before a payout – evidence of your redundancy will usually be required. After this you will get a regular payout into your bank account from the insurer towards your outgoings. How much will depend on you – when taking out a redundancy policy you will often be asked what percentage of your regular income you want covered, or what monthly sum you will need if put out of work.

A policy will rarely cover 100 per cent of your income – choices often range between 50 and 80 per cent. The length of time a policy pays out for is also agreed at the time of applying for the cover, and this will be anything from a few months to a year or 24 months – policies do not pay out indefinitely and are designed only to keep you going while you search for other work. In most cases, an insurer will also not payout immediately, and will often make the first payment around a month after a successful claim.

Cover Redundancy

Having decided you need something to cover redundancy, all that is left is to find the right provider for you. Before starting a search, it is worth bearing in mind that the payment protection insurance industry as a whole is one which has attracted a lot of negative attention in recent years. The sector is still being investigated by the Competition Commission, the conclusion of which is expected in February 2009. This follows action by the Financial Services Authority which in 2007 fined some big-name companies for mis-selling payment protection policies to people who did not need them or did not qualify for them. However, most of the concern was focused on general policies sold to people at the time of taking out loans, rather than on schemes which cover redundancy alone.

Finally, it is also worth remembering your regular insurer may not be able to provide the best available deal. Some bigger firms offer poor value for this type of cover and smaller, independent firms which specialise in supplying policies which cover redundancy may be cheaper. Ensuring you shop around could save you thousands in the long run if your policy runs until you retire.

Resources:
* http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/13/bcnboe413.xml
and http://www.nysun.com/business/bank-of-england-head-recession-looms-in-britain/83860/
** http://business.timesonline.co.uk/tol/business/economics/article4546817.ece