What is redundancy insurance and who offers it?

Being made redundant is both an emotionally and financially stressful situation. And unfortunately, it’s something that many Australians are currently going through.

Australia’s unemployment rate increased to 7.1% in May, from 6.4% in April and 5.2% in March. According to the latest figures from the Australian Bureau of Statistics (ABS), almost a quarter of a million people (227,700) became unemployed between April and May 2020. The ABS estimates that around 2.3 million people, or one in five employed people, were either affected by job loss between April and May or had fewer hours than usual in May.

Although it’s not the most pleasant thing to think about, it may be worth considering whether you could financially cope in this situation. One way to financially prepare is to build up a buffer by creating an emergency savings fund. Another option to consider is taking out redundancy insurance.

What is redundancy insurance?

Redundancy insurance is designed to provide short-term financial assistance if you involuntarily lose your job due to redundancy, or if you are self-employed and your business becomes insolvent. This covers a portion of your pre-redundancy income for a certain period of time known as the benefit period while you are out of work. Based on the redundancy insurance policies in Canstar’s database, this is usually provided for up to three months, although this can vary depending on your policy. Redundancy insurance generally does not cover voluntary redundancy – for example, if you opt to take a redundancy package or choose to resign.

Some insurers may offer ‘redundancy cover’ or ‘involuntary unemployment cover’ as optional cover on their income protection policies. In Australia, most insurers typically do not offer redundancy insurance as a standalone policy.

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Features of redundancy insurance

There are a few common features and terms you may encounter if you’re considering redundancy cover:

  • Benefit amount: Following a successful claim, insurers will pay a portion of your pre-tax income up to a certain amount. For example, the redundancy insurance policies in Canstar’s database currently provide benefit amounts of up to 85% of your income, up to $3,000 a month. This benefit is usually paid monthly.
  • Benefit period: Benefits are typically paid out for a maximum length of time while you are involuntarily unemployed. This is generally until you start working again or up to three months, whichever comes first. Additionally, policies generally expire when you reach a certain age. This is typically at your policy anniversary after you turn 65 years old.
  • No claim period: You generally need to have had the policy for a certain period of time (usually at least six months) before you are eligible to make a claim.
  • Waiting period: If you are made redundant or your business becomes insolvent, you will typically also need to be out of work for a certain period of time (usually 28 or 30 days) before you can make a claim.
Redundancy insurance
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Redundancy insurance eligibility requirements

To be eligible for redundancy cover, most insurers will require you to be a continuous permanent employee or a self-employed person working at least 30 hours per week. Age limits may also apply. You will also typically need to be continuously employed or self-employed for six months prior to making a claim. These conditions can vary between different insurers and policies, however, so it could be worth checking the product disclosure statement (PDS) or contacting your provider before signing up to a particular policy.

Redundancy insurance claim requirements

To make a redundancy claim, you will typically need to be employed and made redundant. Alternatively, if you are self-employed, some insurers may require you or your business to have been declared insolvent, bankrupt or placed into insolvency or bankruptcy administration. You will also usually need to be involuntarily unemployed for the duration of the waiting period before you can make a claim.

You will most likely need to provide your insurer with supporting evidence of your involuntary unemployment. For example, this could include your redundancy letter or a notice confirming your insolvency or the appointment of an insolvency administrator to your business. You may also need to provide evidence that you are actively looking for work. For example, you may be required to be registered with Centrelink or a recruitment agency.

Be aware that your insurer will not pay the benefit amount in certain circumstances. For example, you will typically not be covered if you took a voluntary redundancy package or resigned, or if you were made aware of the redundancy or insolvency during your policy’s no claim period. Check with your insurer and read the fine print so you have a good understanding of what you are and aren’t covered for.

Which insurers offer redundancy insurance?

Redundancy insurance as a standalone policy is not offered by many providers in Australia. Instead, it is sometimes bundled as part of an income protection policy. It may be offered as a standard inclusion of the policy or an optional extra. If it is an optional extra, this may result in a higher overall income protection premium. The table below displays the direct income protection insurers rated by Canstar that currently offer redundancy cover. The information is correct at the time of writing, but please check the terms and conditions with the relevant insurer before deciding to take out a particular policy.

Provider Conditions
Insuranceline Option of covering up to 85% of your income up to $3,000 per month, for a maximum of three months. A six-month no claim period and a 28-day waiting period apply.

Insuranceline says its involuntary unemployment cover is not available for purchase online. Contact Insuranceline to apply for cover.

NIB Option of covering up to 85% of your pre-tax income up to $3,000 per month, for a maximum of three months. A six-month no claim period and a 28-day waiting period apply.

NIB says its involuntary unemployment cover is not available for purchase online. Contact NIB to apply for cover.

NRMA Option of covering up to 85% of your pre-tax income up to $3,000 per month, for a maximum of three months. A six-month no claim period and a 28-day waiting period apply.

NRMA says its involuntary unemployment cover is not available online. Contact NRMA to talk about adding it to an income protection policy.

Virgin Money Option of covering up to 85% of your pre-tax income up to $3,000 per month, for a maximum of three months. A six-month no claim period and a 28-day waiting period apply.

Virgin Money says its involuntary unemployment cover is not available online. Contact Virgin Money to apply for cover.

Source: www.canstar.com.au  (as at 2 July 2020). Before committing to a particular product, consider checking the policy terms and conditions with the individual insurer, and whether the product as a whole is suited to your needs.

Do I need redundancy insurance?

If you’re thinking about taking out income protection with redundancy cover, here are some questions you may want to consider:

  • How likely is it that you will be made redundant? The policy will usually need to be in force for at least six months before you can make a claim.
  • Do you think you could find another job quickly? You will typically only be paid benefits while you are unemployed or up to a maximum of three months.
  • How much do you earn? Would the monthly benefit caps (such as $3,000 a month) be enough to cover your loss of income?
  • How much do you have in savings? Do you have enough to cover any bills and expenses while you are unemployed? You will also usually need to sit through a waiting period of 28 or 30 days before you can make a claim.
  • What redundancy pay might you be entitled to?
  • Could you get by on government allowances, like JobSeeker, that might be available to you? The Coronavirus Supplement has effectively doubled unemployment benefits for eligible Australians on Centrelink, however this is due to stop in September 2020.
  • What existing cover do you have? For example, if you have a home loan, mortgage protection insurance typically covers or helps cover your home loan repayments if you are involuntarily unemployed.

This article was originally written by Dominic Beattie

Image Source: GaudiLab (Shutterstock).

 

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