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Income Protection Insurance Redundancy Guide

One of the UK’s most common questions about income protection insurance is ‘Does income protection insurance pay out for redundancy?’. While certain income protection policies will pay out for redundancy, most policies don’t and it’s important to understand if you would be covered in this situation.

Income protection insurance pays you a regular tax-free income if you can’t work for longer than 4 weeks due to an illness or an injury. Accident, Sickness and Unemployment (ASU) insurance works similarly to short-term income protection insurance, but also pays out if you are made redundant.

In this guide, our team of insurance experts look in depth at the topic of income protection insurance and redundancy in the UK. Our experts will explain what Accident, Sickness and Unemployment (ASU) insurance is, how it is different to standard income protection, and how it works to protect you and your family.

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60-Second Summary – Income Protection Insurance Redundancy Guide

Standard income protection insurance won’t protect you against redundancy, but specific policies like Accident, Sickness and Unemployment (ASU) insurance will. ASU insurance isn’t as widely available as traditional income protection, but it can provide useful financial protection for your family.

According to Statista, around 90,000 people were made redundant in the UK between January and March 2024. Though it isn’t fun to think about, it’s worth considering how you and your family would cope financially if you were made redundant unexpectedly.

  • Most types of income protection insurance will not pay out for redundancy, and instead focus on protecting you against the financial impact of illness or injuries.
  • Standalone unemployment insurance is not generally available now, though it was available before the Covid-19 pandemic began in 2020.
  • Accident, Sickness and Unemployment (ASU) insurance will pay out for sick leave caused by an illness or injury, as well as paying out if you are made redundant.
  • Accident, Sickness and Unemployment (ASU) insurance pays out for 12 to 24 months maximum, which is the same as short-term income protection insurance.
  • Accident, Sickness and Unemployment (ASU) insurance is often more expensive than standard income protection, which is why many people choose to buy short-term income protection insurance instead.

Standard income protection insurance won’t cover redundancy, but you may be eligible for Accident, Sickness and Unemployment (ASU) insurance which would pay out if you’re made redundant.

You can apply for Accident, Sickness and Unemployment (ASU) insurance if you are over 18 and are currently working. Some insurers will have specific criteria that you will need to meet, such as having been in your job role for a minimum of 12 months. The policies will protect you both if you can’t work for a period of time because you are ill or injured and if you are made redundant.

These policies will usually pay out for a maximum of 12 or 24 months, and these payments should ideally give you enough time to find a suitable new job role. This can give you some peace of mind that you will be financially supported until you can return to work after losing your job.

Key things to be aware of with ASU Insurance:

  • Like other types of income protection, ASU insurance will include a waiting or ‘deferred’ period between claiming and your policy paying out (usually 4 weeks minimum).
  • When you apply, you will be asked questions about your job role, the industry you work in, your average income, and how long you have been employed for.
  • You may also be asked whether you own or rent your home, as certain policies have been designed specifically for mortgage protection.
  • The price of your monthly premiums will be based on your age and your health, which includes your smoker status and any pre-existing medical conditions.
  • You will need to have had the policy for a set amount of time before claiming for redundancy (e.g. 60 days). You can’t be made redundant and then buy and claim on a new policy.
  • These policies provide short-term financial protection, as they will pay out for a maximum of 12 – 24 months in most cases. Long-term policies aren’t available, unlike with standard income protection insurance.

Another option is Mortgage Payment Protection insurance, though these policies haven’t been widely available since the financial crash in 2007. Most people who worry about protecting their mortgage now opt for income protection insurance, as this is cheaper and more easily available.

Note: Accident, Sickness and Unemployment insurance is sometimes called ‘Payment Protection Insurance’ or ‘PPI’. There was a time when PPI was mis-sold to many customers, which led to drastic actions and fines from the Financial Conduct Authority (FCA) to protect consumers.

Can you claim income protection if made redundant?

If you have a standard income protection insurance policy, redundancy is usually ‘excluded’ which means that you can’t claim for this. If you’re not sure whether redundancy is covered within your policy, this will be explained to you within your policy documents.

Being made redundant can have a drastic impact on your life, and this video from BBC Ideas contains some useful tips for dealing with redundancy.

Three tips to help you through redundancy | BBC Ideas

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If you have an Accident, Sickness and Unemployment (ASU) insurance, you will be able to submit a claim if you can’t work due to your health or because you have been made redundant.

You will be protected against a range of scenarios that lead to compulsory redundancy, but if you choose to take redundancy voluntarily this won’t be covered. You also can’t buy a policy and claim if you already know that you are about to be made redundant, as this would be classed as fraud.

Insurers are also unlikely to consider you as being made redundant if your employer has offered you an alternative job role. The exception would be if there is a valid reason that you could not accept this role (e.g. it’s not accessible to you due to a disability).

As with standard income protection, Accident, Sickness and Unemployment (ASU) insurancewill cover a set percentage of your usual income. If you’re not sure how much of your income can be covered, some online calculators can check this for you. An experienced broker would also be able to explain how much cover you can have and what would be the most appropriate level of cover for you.

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Redundancy usually happens unexpectedly and can have a drastic impact on your family’s financial situation. If it takes weeks or months for you to find a new job, this could cause a lot of stress and financial worries for you and your loved ones.

Most types of income protection insurance won’t pay out for redundancy, and this is something that you should be aware of when looking for a new policy. The only income protection insurance policy that will cover redundancy is Accident, Sickness and Unemployment (ASU) insurance.

The table below highlights the main features of both income protection insurance and Accident, Sickness and Unemployment (ASU) insurance. The aim of this is to help you understand how each policy works, and the main differences between the two types of cover.

The main differences between income protection insurance and ASU:

Income Protection InsuranceAccident, Sickness and Unemployment (ASU) Insurance
Options for either short term or long-term policies.Can only buy short term policies (pays out for either 12 or 24 months).
Available with most of the UK’s top insurance companies.Not as widely available following the coronavirus pandemic.
Pays out for time off work due to accidental injuries or illnesses.Pays out for time off work due to accidental injuries, illnesses or being made redundant from your role.

Another policy that can be useful is ‘redundancy protection’ which is specific to being made redundant and would not pay out for sick leave. However, these policies stopped being widely available following the start of the coronavirus pandemic in 2020.

Can you get Legal & General income protection for redundancy?

Legal & General income protection insurance will not pay out if you are made redundant from your job role. Legal & General’s website states: ‘Income Protection Benefit is not unemployment cover so it won’t pay out due to being made unemployed.’

Legal & General ‘Illness & Injury Insurance’ covers 60% of your usual income and would pay out for up to 12 months if you can’t work because of your health.

Does Aviva income protection cover redundancy?

Aviva’s Living Costs Protection policies will not pay out for redundancy and have been designed to only pay out if you are unable to work due to illness or accidental injury.

Aviva does not sell standalone unemployment insurance, and this isn’t a policy that is widely available with other insurers anymore.

Can income protection cover voluntary redundancy?

Though Accident, Sickness and Unemployment (ASU) insurance will pay out for redundancy, even these policies won’t generally cover voluntary redundancy.

You also wouldn’t be covered for being dismissed from your job role or leaving voluntarily.

Do I need redundancy insurance?

While redundancy insurance or income protection in general might not seem like a priority, it can provide a massive amount of support if you can’t work.

Having some form of income protection can be most useful if you don’t have a lot of savings in place and would struggle with your usual bills if you couldn’t work. This can be especially worrying for someone with children or other dependents who rely on them financially.

The best way to find the lowest prices for your cover is to shop around for the best quotes. Many UK consumers choose to use price comparison websites for this, which includes sites like GoCompare and Compare the Market.

Our insurance experts don’t currently sell Accident, Sickness and Unemployment (ASU) insurance, but can advise about other types of income protection insurance. Though standard income protection won’t cover unemployment, it can still provide useful financial support for you and your family.

If you need help finding the best income protection quotes or need some free advice, you can CLICK HERE or call our insurance specialists on 0800 009 6559.

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Is it worth having income protection insurance?

Income protection insurance can be extremely useful and very important for anyone who is unable to work due to sickness or an injury (e.g. from an accident, sports, work etc.). Essentially, income protection insurance pays out monthly to replace any lost earnings while you are unfit or unable to work.

Payments for income protection insurance can be used to pay your mortgage, rent, other credit commitments, food bills, utilities and other regular outgoings.

Common myths about income protection insurance:

  • Income Protection Insurance won’t pay out
  • Statutory Sick Pay (SSP) from the government will cover me
  • The cost of Income Protection Insurance is high
  • People with medical conditions can't have Income Protection Insurance
  • My employer will help support me
What does income protection insurance cover?

As a rule of thumb, income protection insurance will pay out a regular monthly tax-free payment to you if you can’t work and you are signed off by a doctor. You will need to provide supporting evidence from a medical professional such as your GP and proof of income from your employer or accountant.

Example: Sarah was involved in a car accident which resulted in a serious back and neck injury that prevented her from being able to drive for 6 months. She was able to claim on her income protection policy after 4 week for the remaining 5 months until she was able to move and drive again. She would also usually be able to claim for rehabilitation and physiotherapy to help her to return to work as planned.

Do I need income protection insurance for a mortgage?

Income protection insurance and mortgage life insurance are not compulsory for getting a mortgage in the United Kingdom. Some mortgage lenders might ask for you to get insurance as a condition of the mortgage offer in some circumstances but this is rare.

It is strongly recommended to have insurance to protect you and your family if you have a mortgage and other credit commitments. If you consider what the financial impact would be if you were unable to work due to accident, sickness or injury, and even if you were to die.

Most common mortgage protection insurance policies:

  • Buildings insurance
  • Mortgage life insurance
  • Income protection insurance
  • Critical illness insurance
  • Mortgage payment protection insurance (Accident, Sickness & Redundancy
Is income protection insurance tax free?

Payments from an income protection insurance claim are almost always tax-free, apart from some business income protection policies. This is because you pay tax on the premiums for personal income protection insurance at source (i.e. the premiums are paid from your net monthly salary).

The same applies to life insurance premiums and payouts, effectively you have already paid tax on the premiums that you have paid. There are some other possible tax implications that may apply in certain circumstances so you should seek proper advice or guidance if you have any specific questions.

Which is the best income protection insurance UK?

It’s very difficult to say overall which income protection insurance policies or providers are the best, simply because there are so many different options and types of cover. You can get income protection insurance from an even wider range of insurance providers than life insurance, so your choice is even greater.

The most common income protection insurance policy is:

  • Short term income protection insurance (24 months)
  • 4-week deferred period (pays out after 1 month of absence)
  • Guaranteed premiums (fixed premiums)
  • Underwritten income protection insurance

There are several other cover options for income protection insurance (e.g. long-term, age rated, reviewable premiums, guaranteed acceptance and 0 weeks to 12 months deferred periods).

The top 5 income protection insurance providers according to research by Defaqto are:

  1. Aviva (Trustpilot score: 4.0 out of 5.0)
  2. British Friendly Society (Trustpilot score: 4.1 out of 5.0)
  3. LV= (Trustpilot score: 4.5 out of 5.0)
  4. Royal London (Trustpilot score: 4.0 out of 5.0)
  5. Shepherds Friendly (Trustpilot score: 4.3 out of 5.0)
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