Back in April JPMorgan Chase, the investment bank, predicted that 40,000 jobs in the financial sector could be lost in the next couple of years as a result of the credit squeeze. But, in spite of such ominous tidings, financial advisers say employees are still failing to protect themselves against the financial repercussions of redundancy.
A survey carried out by Prudential found that only one in three adults in the UK has insurance that will provide them with an income if they lose their job.
Latest figures from the Association of British Insurers show that sales of mortgage payment protection have fallen, and insurance providers say they have also seen an increase in existing protection policies being cancelled, as policyholders rearrange their finances to deal with rising mortgage, food and energy bills.
“Unemployment protection is an important product,” says Emma Walker, head of insurance research at Moneysupermarket.com. “And as with many insurance products, the best time to buy it is when you least need it, not after you find out you’ve been made redundant.”
If policyholders are aware at the time they take out income protection insurance that they are likely to be made redundant the insurer will not pay. Pre-existing medical conditions are also not eligible for cover.
Income protection can be bought as a long- term medical insurance product, which pays out for the length of time it takes to recover, even if that is retirement, or short-term payment protection insurance (PPI) such as accident, sickness and unemployment insurance (ASU), mortgage payment protection insurance (MPPI) and loan payment protection insurance.
The plans all provide cover in the event of unemployment or ill health leading to loss of earning ability, although they differ as to exactly what they will include.
The two main causes of ill health leading to an inability to work are stress and back problems, but insurers such as British Insurance Limited and Hitachi Capital UK do not cover these.
Typically, a policy will start a month after income stops, and will carry on for a limited time such as one or two years.
Payments can be deferred for 30, 60, even 90 days, and policies that do not pay out immediately are generally cheaper. Advisers say individuals should establish whether their employers offer a redundancy package and how long they would be able to manage without income before buying a policy.
“You have to ask whether a short-term policy that doesn’t pay out for three months is worth anything,” says Walker. “Don’t be lured into thinking that a cheap premium is a good premium.”
Protection plans such as ASU are simpler in design than longer-term income protection policies which require specific medical information but have suffered from negative publicity in recent years.
The FSA has fined a number of banks for overly-aggressive sales of short-term insurance and a probe carried out by the Competition Commission this year attacked the high levels of profit that banks made from these products. It said the lack of competition in the market meant consumers faced limited choices and high costs.
In spite of this condemnation, advisers say there are hundreds of different products available. Some offer greater flexibility than others, allowing for job changes and increased cover.
Redundancy cover can be bought as standalone insurance, or as part of a wider income protection policy. Short-term cover can be cheaper in some cases and easier to set up as it does not require medical underwriting or health checks.
LV= recently launched a combined mortgage and lifestyle protection policy, while LifeSearch launched Real Life Cover which combines life, critical illness (CIC) and income protection (IP) cover.
ASU policies can be purchased from high street banks, loan providers, supermarkets or online. The FSA has a comparison service of different products: www.moneymadeclear.fsa.gov.uk.
