Does Income Protection Insurance Cover Redundancy?

Key things to know

1. Standard income protection pays out when illness or injury stops you working, and does not cover redundancy.
2. Unemployment cover, often sold as the unemployment element of an ASU policy, typically replaces up to 65% of gross monthly income, capped at a fixed maximum, for up to 12 months per claim.
3. Claims are refused if you knew redundancy was possible before the policy started or during the initial exclusion period.
4. Statutory redundancy pay comes from your employer; redundancy insurance is a separate product that pays on top.
5. Payments from these policies are generally tax-free where premiums were paid out of taxed income.

Income protection is built around one risk: illness or injury that stops you earning. Losing your job is a different risk, covered by different products, and the two are regularly confused at the point of sale. This guide sets out what standard income protection will and will not do if you are made redundant, how separate unemployment cover works, and what to check in the documents before you commit to a premium.

What Does Income Protection Cover?

Standard income protection pays out when illness or injury prevents you from working, and it does not pay out for redundancy. The product traces back to permanent health insurance, which insurers created so that people, and the self-employed in particular, could keep an income coming in if sickness or disability ended their working life. Policies are often sold under the names income protection or sickness insurance. Once a claim is accepted, benefits can usually continue until you go back to work or reach normal retirement age, which makes this long-term cover rather than a short-term stopgap. Payments are generally free of income tax where the premiums were paid out of taxed income. Our guide to what income protection insurance is and how it pays out explains the benefit level, deferred period and definitions in more detail.

Why Is Redundancy Usually Not Included?

Because the policy is priced around your health, not around the state of the job market. Insurers assess the risk that you personally will fall ill or be injured, using your medical history and your occupation. Redundancy depends on your employer’s decisions and the wider economy, so insurers treat it as a separate risk with its own product. Many buyers assume otherwise, and that assumption is a common reason a claim goes nowhere. The savings picture sharpens the stakes: the FCA’s Financial Lives survey found that roughly one in ten UK adults hold no cash savings at all, and a further 21% would have under £1,000 to draw on if an emergency struck.

Can You Buy Insurance That Pays Out If You Are Made Redundant?

Yes, but as a separate product, usually called unemployment cover or the unemployment element of an accident, sickness and unemployment (ASU) policy. HMRC’s insurance guidance treats these as employment protection policies: contracts that pay out when the policyholder is made unemployed or can no longer carry on in self-employment. If your employer makes your role redundant, the policy pays a set amount each month, commonly replacing as much as 65% of what you earned, with payments running for up to a year per claim. Policy wordings commonly cap the benefit at £2,000, £2,500 or £3,000 a month. You can usually choose which components to include: accident, sickness, unemployment, or cover if you give up work to care for someone. The table below shows how the products sit side by side.

Cover type	What triggers a claim	Typical payment period
Income protection	Illness or injury stops you working	Until you return to work or reach retirement age
Unemployment cover	Involuntary redundancy	Generally 12 months per claim
ASU or mortgage payment protection	Illness, accident or unemployment	Usually a maximum of one or two years

How Does the Excess Period Work?

You choose how much income to cover and an excess period, which is the gap between your last day of work and the day your first payment lands. Opting to wait longer before the benefit starts usually brings the monthly premium down. Once a claim is accepted, payments continue month by month until you are working again or the benefit period runs out.

How Did Payment Protection Insurance Differ?

Payment protection products were tied to a specific bill or debt rather than your whole salary. Mortgage payment protection insurance existed to keep up a borrower’s monthly mortgage payments if they fell ill or lost their job, usually for no more than one or two years, and is often referred to as an ASU policy. Creditor insurance did much the same job for credit cards, loans and hire-purchase agreements, paying off the debt if you fell ill or lost your job. Neither should be confused with mortgage protection life insurance, which pays off the mortgage if you die. The practical difference from income protection is the short payment period and the narrow purpose of the money.

Is Redundancy Insurance the Same as Statutory Redundancy Pay?

No. Statutory redundancy pay is what the law requires your employer to give you when your role disappears, and the amount depends on your age and how long you have worked there. Redundancy insurance is something you arrange yourself, in advance, and anything it pays comes on top of that legal entitlement.

What State Support Is Available If You Are Made Redundant?

State support exists, but it is limited and time-limited. Workers who have paid enough contributions can claim contributory benefits such as New Style Jobseeker’s Allowance. The government has also set out plans to consult on replacing contribution-based Jobseeker’s Allowance and Employment and Support Allowance with a single “Unemployment Insurance” benefit, paid at the current ESA rate of £138 a week and time-limited. Eligibility depends on your contribution record, and figures can change, so check the current position on GOV.UK rather than relying on older summaries.

What Catches People Out With Unemployment Cover?

Timing. Insurers reject a claim where the risk of redundancy was already apparent when the policy began, or where it became apparent during the opening exclusion period, usually the first few months, even where the official notice only arrives after those months have passed. Most wordings also rule out payment where redundancy was already on the cards, or where you believed it might be, at the point you bought the cover, where you resign, or where you are dismissed for misconduct. Once a job loss starts to look probable, the chance of buying cover that will actually pay has usually gone. Self-employed workers and company directors should read the terms closely, because cover can be more limited for them.

Watch for: If a redundancy consultation, restructuring or any other sign of trouble has already begun, unemployment cover will generally not pay out. The policy only works when it is bought well before any risk appears.

What Should You Check Before Buying Unemployment Cover?

The documents, and specifically these points:

• The benefit level and cap. Check the percentage of income paid, the monthly maximum and whether the figure is based on gross or net pay.
• The excess period. Match it to any savings you hold, so you are not paying for a shorter wait than you need.
• The benefit period. Many policies pay for 12 months per claim; confirm what happens if you are still out of work when it ends.
• The exclusions. Note the initial exclusion period, the rules on knowledge of redundancy, and any restrictions for the self-employed or company directors.
• The components. Decide whether you need unemployment cover alone, sickness cover alone, or both, since buying everything costs more.

If a claim is refused and you believe the decision is wrong, our guide to challenging a rejected insurance claim sets out the appeal route. And if your main worry is a long illness rather than job loss, our comparison guide to income protection policies shows how to weigh one policy against another.

Before you buy, read the full policy document, paying particular attention to the initial exclusion period and the definition of involuntary unemployment.

Questions answered

Does income protection insurance cover redundancy?
No. Standard income protection covers illness or injury that stops you working. Redundancy is covered, if at all, by separate unemployment cover or the unemployment element of an ASU policy.

How much does unemployment cover pay?
A common ceiling is 65% of your gross monthly income, subject to a fixed cap that in many wordings sits at £2,000, £2,500 or £3,000 a month, with payments typically lasting up to 12 months per claim. Check the benefit level, cap and payment period in each policy before buying.

Can I buy unemployment cover if redundancy is already likely?
Generally no. Policies exclude claims where you knew, or had reason to believe, redundancy was possible when you took out the cover or during the initial exclusion period.

Are income protection payments taxed?
Payments from policies taken out to protect against sickness, disability or unemployment are generally tax-free where you paid the premiums out of taxed income.