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Does income protection cover redundancy?

Many people mistakenly believe that getting income protection insurance automatically covers them for involuntary redundancy (i.e. getting laid off from their job through no fault of their own). But unfortunately, it’s not that simple. Income protection is designed to provide you with a percentage of your wage for a period if you fall ill or get injured and are unable to work due to that illness or injury – not if you find yourself unexpectedly unemployed.

So, can you insure against redundancies?

What is redundancy insurance?

Redundancy insurance can help provide you with financial support after you’ve been made involuntarily redundant due to an illness or injury. The redundancy cover can provide delivers you with a supplement income for a period. For example, your redundancy cover might pay you 75% of your lost income for three months.

Redundancy insurance policies aren’t a typical feature of income protection. If offered by an income protection insurance company, they could be offered as an optional extra that you can add to your income protection cover.

You might find that banks may offer redundancy cover to customers with both a mortgage and income protection policy. With these products, the benefits paid out generally go straight towards home loan repayments.

How can I get covered for redundancy?

To apply for and receive redundancy insurance, you’ll need to:

  • Be of working age
  • Be either employed or self-employed
  • Work more than 30 hours per week.

Redundancy insurance can also cover people working on a contract basis and may be paid if their contract is cut short by no choice of their own.

Like all types of insurance, be sure to read your Product Disclosure Statement (PDS) to determine if you’re eligible and what you’re covered for.

What benefits and restrictions should I look for?

Essentially, redundancy cover offers personal security during a difficult time. There are also several benefits you should be aware of when securing a policy in the first instance (including a monthly income and premium waiver while you’re claiming on this insurance).

Additionally, be on the lookout for these restrictions:

  • Maximum claim limits. You may be able to receive between $1,000 and $4,000 per month.
  • No claim periods. You may have to wait a certain period between when you take out your policy and when you’re able to claim (e.g. six months).
  • Waiting periods. This is a separate waiting period to the one above, where you have to be out of work for some time before claiming (e.g. 28 days since your redundancy).
  • Age limits. Cover will typically cease after you reach a certain age (e.g. 65 years old).
  • Benefit period. Your insurer may only offer benefit payments for a set period of time, like three months.

Furthermore, you may not be able to claim at all if:

  • You’re put into involuntary unemployment because of injury or illness (which would be covered by income protection insurance).
  • You resign, abandon your job, retire, choose a voluntary redundancy or are let go during probation.
  • There was information available that indicated your business was about to lay off staff, and this information was available when you purchased your policy.

There may be more reasons why you may not be covered by redundancy insurance, and you will be able to find those exclusions that apply to your policy listed in your Product Disclosure Statement (PDS).

Do you need redundancy insurance?

Whether or not this product is suitable for you is a decision only you can make. To help you decide if redundancy insurance is the product for you, ask yourself these things:

Conventional wisdom says you should always have three months’ wage saved up and locked away, in case of emergencies. Of course, this isn’t always possible for everyone.

One thing that’s certainly worth protecting is your ability to earn income. If you cannot work due to illness or injury, it can have a huge impact on your household for a long time. Luckily, income protection insurance can help ease this burden for a time. Learn more about the types of income protection, or start comparing policies now.

Man taking out redundancy insurance

Frequently asked questions

How much does redundancy insurance cost?

Your premiums will be calculated using factors unique to you, such as your age and occupation; therefore, the cost of redundancy insurance will be different for everyone. Furthermore, redundancy cover is usually an optional extra, so insurers may charge different amounts to add it to your income protection policy. This will, in turn, affect your income protection premium.

However, the premiums you pay for your income protection insurance may be tax-deductible.1

How do I claim redundancy insurance?

When making a redundancy insurance claim, you’ll generally need to provide your insurer with a copy of your redundancy letter. However, before you get to that stage, many insurers will require that you:

  • Had no prior knowledge of the redundancy
  • Were made redundant involuntarily
  • Were continuously employed for a period (typically six months) before the redundancy
  • Sit a waiting period before making a claim (usually 28 days).

Some insurers may even require you to actively seek new employment (e.g. registering with a recruitment agency) before approving your claim.

Is there a difference between voluntary and compulsory redundancy?

Yes. A voluntary redundancy happens when your employer offers you financial compensation to agree to terminate your employment. A compulsory or involuntary redundancy doesn’t give you that choice, and your employment is terminated regardless of whether you agreed to it.

Redundancy insurance, therefore, only covers involuntary redundancy since you were essentially forced out of your job.

How does unemployment insurance affect Centrelink payments?

Your involuntary unemployment cover benefits may affect your Centrelink payments. For example, suppose you were to register for JobSeeker payments while searching for new employment; in that case, Centrelink would consider your income (which may include your insurance benefits) when assessing how much to pay you.2

If you’d like to know how your redundancy insurance may affect any Centrelink payments you receive, you can contact your insurer or Centrelink to find out.

How much are unemployment benefits per week?

That will depend on where your unemployment benefits are coming from. If you were receiving benefits from your redundancy insurance, your monthly benefits would usually amount to a percentage of your income or up to a dollar figure (e.g. $3,000).

If you’re receiving unemployment benefits from Centrelink, the amount you’ll receive will depend on several different things, like which payment you’re eligible for (e.g. JobSeeker, Youth Allowance, etc.) and your individual circumstances. To find out how much your unemployment benefits from Centrelink could be, contact Centrelink.

Can I access my superannuation if I'm made redundant?

There are certain grounds on which you may access your superannuation before retirement age, including severe financial hardship (which can happen after a job loss).3 In this event, you’ll need to contact your super provider directly to apply for early release.

Keep in mind any potential impacts that early withdrawal from your super can have on your future retirement lifestyle.

Anthony Fleming, General Manager

Insurance tips from Anthony Fleming, General Manager of Health Insurance and Life Insurance

  1. When deciding if redundancy cover is right for you, it’s essential to consider your current financial position. Some may find redundancy insurance worthwhile, especially those without savings or a safety net, whilst others may decide that it’s not worth the additional cost. Ask yourself: Would you be able to cope financially after losing your job involuntarily?
  2. In some instances, your type of work (e.g. full-time, contract, etc.) or the industry you’re in may impact your eligibility for redundancy cover. If this is the case, remember there are other life insurance options that could suit your needs.
  3. Remember to check the maximum monthly benefit as well as the maximum payout period before deciding to add redundancy cover to your existing income protection policy. It’s possible that the maximum possible payout won’t be more than you could save on your own.

Note: Compare the Market may not provide redundancy cover products through either our website or our partners.

The information provided here is general only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it is important to read the relevant PDS.

Sources

1 Australian Government: Australian Taxation Office – Income protection insurance. Last updated August 2021. Accessed October 2021.
2 Australian Government: Services Australia – JobSeeker: Income test. Last updated April 2021. Accessed October 2021.
3 Australian Government: Australian Taxation Office – Early access to your super. Last updated September 2021. Accessed October 2021.

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