Moneyworks - A clause for concern?

Unfortunately, the first few months of 2009 have brought more gloom with unemployment having risen by 0.6% from December 2008 to February 2009, to 6.7%. In fact, the number of unemployed, the unemployment rate and the claimant count has all increased over this three-month period, with the unemployment rate being 1.5% higher than 12 months ago and standing at 2.10 million as at February 2009. To put this in perspective, the unemployment level and rate have not been higher since 1997 (source: www.statistics.gov.uk).

With the UK economy still in recession the downward pressures on businesses continue and many of us are understandably concerned about the risks of redundancy, particularly those working in sectors, which have been hit the hardest. Many people are now concerned about protecting against the possibility of losing their jobs through taking out suitable unemployment cover, but is this worth considering, what do these policies provide, and what should you look out for when comparing providers?

Unemployment cover comes in a variety of guises and can either be part of more comprehensive policies, which also cover you if you are unable to work due to accident or illness - e.g. Accident, Sickness & Unemployment Insurance (ASU), Mortgage Payment Protection Insurance (MPPI) - or simply offered as stand-alone redundancy cover. What they all have in common is that, in respect of unemployment, they will usually pay a regular monthly amount (often set at a level to cover mortgage payments and essential bills)

The first point to make is that, although there are insurance policies available in the market, the cost has increased significantly over the last year, due simply to the risk to insurers in terms of the likelihood of claims being made. Indeed some are even no longer willing to provide cover for those in sectors/occupations considered 'high-risk'.

There are also certain limitations in respect of when and how you are covered - it is important to be aware of what is in the small print if you are considering these types of policy. The terminology used in each policy may differ but, broadly, the following types of clauses will be included:

• Initial exclusion period: To prevent people quickly taking out a policy due to imminent prospects of redundancy, all policies providing unemployment cover will have an initial exclusion period. This is a period during which, if you are made redundant, (or receive notice of redundancy), you will not be able to make a claim. Some policies also state that if you become aware of the possibility of redundancy "by any means" (before the policy start date or during the initial exclusion period) you are not covered. Exclusion periods can vary from as little as 30 days to 180 days after the policy start date with the premiums obviously being higher for those policies with the shorter exclusion periods.

 

• Deferred period: Most policies will include a choice of deferred period - These can range from 0 days up to 13 weeks. The deferred period is the amount of time after a valid claim has been made before the policy starts paying benefits. For example, with a 13 week deferred period you would have to wait 3 months from the date of your claim before any payment of benefits started so you would need to ensure you have savings to cover your lost income during this period. Again, generally speaking, the shorter the deferred period selected the more expensive the cover is.

 

• Waiting period: Not to be confused with the deferred period, the waiting period is the time you have to wait until actual payment is received in respect of a valid claim. For example, a policy may have a deferred period of 0 days but a 30-day waiting period - this means you would have to wait 30 days from the date of redundancy for your first payment even though the benefits payable would be backdated to day one.

 

• Excluded claims: This may sound obvious but unemployment cover will only cover you against loss of employment due to involuntary redundancy - resignation, dismissal (whether unfair or otherwise!), and voluntary redundancy would not be covered. Similarly, policies will generally not be suitable for those on temporary or fixed-term contracts or those who have not been in continuous work for at least the last 6 months. You would be well advised to ensure you read all the exclusions under a specific policy to ensure you fully understand in what circumstances you would be covered.

 

• Maximum benefits: A final issue to be aware of is that these policies will not pay out indefinitely in the event of you being made redundant. The most comprehensive policies will only pay benefits for a maximum of 24 months in the event of a claim being made however; in reality, most policies will only pay benefits for a maximum of 12 months. In addition you will find a cap on the maximum monthly benefit for which you can insure which, for example, is typically set at 75% of your monthly income (subject to an overall limit of £1,500 per month).

Despite the above limitations, the current economic climate may very well be a timely reminder that it is worth, at least considering unemployment cover.

Although taking out a policy will not be sufficient to protect you against being made redundant in the next few months, some economists estimate that rising unemployment could continue to be an issue, with some predicting unemployment figures possibly peaking at 3.3 million by the middle of 2010 or early 2011 (source: www.timesonline.co.uk March 18th 2009)

You may also need to consider whether a policy is value for money, particularly if you feel you already have adequate 'emergency' savings and believe that you would quickly find a new job. However it may well be worth considering what you would do in the event of the worst happening, particularly if you consider the level of statutory redundancy payment is only one week's pay (capped at £350) for each year of service*

* based on an employee aged between 22-41 with 2 years service and, for the purposes of the calculation, subject to a maximum of 20 years service.

 

Money Works is published by Moneyweb Limited

Summer Issue 2009