Unemployment has topped 2.6 million, its highest level since 1994, and is rising.
That means unemployment insurance could prove particularly valuable over the coming months. A growing number of people are losing their jobs as a result of government cutbacks and businesses tightening their belts as demands fall for their goods and services. Without a regular income, many families could fall behind with mortgage and other debt repayments.
Some people in this situation may end up regretting that they were encouraged by professional claims managers to cancel the unemployment cover for some loan repayments they had through payment protection insurance (PPI).
Redundancy fears have risen significantly over the past year. Nearly six out of 10 (59%) workers are now worried about job security compared with 51% in May 2010 according to a survey by online income protection insurance provider British Insurance. During the same period, however, the proportion of people with unemployment insurance has dropped from 20% to 14%.
This is partly as a result of bad publicity from the widespread mis-selling of PPI. However, there has been a tendency to throw the baby out with the bath water according to Ben Heffer at financial research organisation Defaqto. “Claims lawyers jumped on the bandwagon when it was clear that some people had been mis-sold the cover, but this has meant that others, who could have benefited from this insurance, have encashed their policies.”
Mortgage lenders were particularly disappointed that mortgage payment protection insurance (MPPI) was tarred with the same brush, and believe it is has put people off buying insurance that could cover their repayments during periods off work due to unemployment or short-term ill health.
Sue Anderson at the Council of Mortgage Lenders, said: “It was a real shame that MPPI was tarnished by PPI. Lenders had made sure that MPPI policies conformed to minimum standards and their effectiveness was shown by the fact that 80% to 90% of claims were fully met, which meant that these homeowners were protected from getting into arrears. It probably accounts for the lower repossession figures we have seen in recent years.”
It is still possible to buy unemployment cover, usually combined with accident and sickness insurance, but now policies are often described as “short-term income protection”.
They are not linked to any particular loan so they can be taken out to cover mortgage repayments, or the monthly benefits can also be used to pay rent, utility bills or other regular outgoings. The maximum benefit is usually 50% or 60% of the policyholder’s income. Payments will normally start after 30 days, although they can be backdated to the first day off work, or longer waiting periods can be selected to reduce the premiums. Once payments start, they will continue until the policyholder returns to work, or for either 12 or 24 months.
The Nationwide building society launched a short-term income protection policy this summer called Lifestyle Protector, which allows people to take stand-alone unemployment cover with a maximum benefit of £2000 per month for up to 12 months. There are also a number of online providers with cover at competitive rates, such as British Insurance, Columbus Direct, Paymentcare.co.uk and Paymentshield.
The cost of the policies will depend on the level of cover and the waiting period. Where a policy offers both accident and sickness as well as unemployment benefit and starts paying out after 30 days, premiums begin at around £3 to £4.50 for every £100 of benefit, so for payments of £1000 the cost would begin at around £30.
No particular occupations or employment sectors are excluded, says Shane Craig, managing director of Paymentcare.co.uk, providing workers meet the eligibility criteria.
He says: “You must be aged between 18 and 65, live in the UK and have been continuously employed for at least six months prior to the start of the policy and be actively working when the claim occurs for at least 16 hours a week.”
It is also important not to leave it too late. If you are already aware that you are likely to be made redundant when you take out a policy, your claim will be rejected. Even if this is not the case, policies do not come into force immediately.
British Insurance managing director Nel Mooy says: “I worry many only consider [short term income protection] once they’ve heard their job may be at risk. Most policies have an initial exclusion period of 120 days after their start date, which means if you’re unemployed within the first four months of taking out cover, you won’t be able to claim. So apply for cover while your job is secure.”
However, Mr Heffer cautions: “These policies are good for unemployment cover but if you want permanent ill-health cover you need long-term income protection.”
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