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Redundancy and Income Protection Insurance

Mitch Ramsbotham

Financial Expert Updated on June 20, 2023

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Redundancy isn’t easy. But you can make a difficult time less challenging by putting the right insurance solutions in place to financially support you and your family.

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Insurance policies are designed to provide financial support and protection through tough periods of time – such as job loss or 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, this is not the case.

Income protection does not cover redundancy.

So how can you ensure to protect yourself financially in the event of a redundancy?

As income protection insurance does not cover job loss, you may be interested in getting cover that offers protection if this scenario was to occur. Redundancy insurance can be beneficial to people as they search for new employment. 

This article provides helpful information about redundancy insurance and income protection, including redundancy insurance’s features and why you might need a redundancy cover.

This guide also discusses redundancy insurance’s coverage and exclusions, its eligibility and claim requirements, and how to claim redundancy benefits successfully.

What Is Redundancy Insurance?

Redundancy insurance provides a financial benefit if you involuntarily lose your job due to retrenchment or redundancy.

This financial benefit can provide a level of financial security for yourself and your loved ones, while you attempt to re-enter the job market. 

What Does Redundancy Insurance Cover?

To qualify for a redundancy claim, you will need to be unemployed, with your employment ceased due to the following:

  • Retrenchment: where an employee is dismissed due to redundancy and the employer cannot offer an alternative position to the retrenched employee.
  • Redundancy: where the employer no longer requires the employee to fulfil the role. The role will also not be provided to another candidate, but will in effect, no longer exist. 

Redundancy insurance can help you financially as you search for a new job.

Not all insurers offer this type of insurance, with redundancy insurance being far less common than other life insurance types.

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Redundancy Insurance Features

The following terms and features apply to redundancy insurance policies:

  • Benefit amount: Insurers will pay a part of your pre-tax income up to a certain amount.

For example, some redundancy insurance policies provide a monthly benefit amount of up to 85% of your income. Some insurers have a cap of $3,000 per month.

  • Benefit period: Your benefits are usually paid out when you become involuntarily unemployed. Payments can continue up to three months or until you find a new job, whichever comes first.

Keep in mind, redundancy insurance generally expires when you reach a specific age. Usually, most insurers set this expiry period at your policy anniversary after you turn 65.

  • No claim period: Before being eligible to make a redundancy claim, you usually need to hold the policy for a period of time. For many insurers, this period is at least six months.

    This means you can’t purchase a policy after you’ve been made redundant and still expect to be paid out.
  • Waiting period: After you are made redundant or your business becomes insolvent, you have to be out of work for a certain period before making a claim. Some policies have waiting periods of around 28 – 30 days.

The Difference Between an Income Protection Policy and a Redundancy Insurance Policy

Despite their similarities, redundancy insurance and income protection insurance policies are two completely different products.

Income protection policies provide a financial benefit if you cannot work due to an injury, illness, or disability.

Redundancy insurance covers you financially if you involuntarily or unexpectedly lose your job because of retrenchment or redundancy.

Some insurers offer both insurance types packaged together. Most insurance providers in Australia do not provide redundancy cover as a standalone product, however, income protection insurance is able to be purchased as a separate standalone policy. 

Before purchasing any insurance product, consult a Financial Adviser or Insurance Adviser for options that best fit your needs and financial goals and review the policy’s Product Disclosure Statement (PDS) which will outline the policy’s terms and conditions. 

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Does Income Protection Cover Redundancy?

Income protection insurance does not cover redundancy. In Australia, redundancy insurance is an optional add-on to income protection. However, not all insurance providers offer redundancy insurance.

If you believe you need protection from involuntary redundancy, ask a financial adviser for quotes from providers offering redundancy insurance.

Note that your premiums will increase once you add redundancy insurance to your income protection policy. Factor in this cost and your financial situation before getting redundancy cover.

Do You Need Redundancy Insurance?

Before purchasing redundancy insurance or involuntary unemployment cover, ask yourself the following:

  • Do your loved ones depend on your income to pay for living expenses and household bills?
  • Does your job have a high chance of becoming redundant? Do you work in an unstable industry? Is the economy weak?
  • Will redundancy cover be sufficient to help with your needs should you be made redundant?
  • Will you find redundancy insurance worthwhile and financially beneficial while you search for a new job?
  • If you become redundant or retrenched, will you be able to immediately find a new, fulfilling job?
  • Do you have savings? Do you have a mortgage with minimum loan repayments to make?Are they enough to cover your bills and expenses in case of unemployment? 

When Are You Not Covered by Redundancy Insurance?

Most redundancy insurance policies come with exclusions. It is important to be aware of these clauses prior to purchasing a policy to avoid encountering unwanted issues, especially when making a claim.

Depending on the insurer, redundancy insurance does not cover you in the following situations:

  • If redundancy occurs within six months since your policy started.
  • Six months before your policy starts, your employer informs you of an upcoming redundancy.
  • Your company makes a public announcement of staff reduction through redundancy.
  • You are self-employed or doing volunteer work (some insurers can ask for additional requirements to allow you to qualify for a redundancy claim).
  • Your job is casual, seasonal, or temporary in nature.
  • You are laid off due to misconduct, suspension, or unlawful acts.

Redundancy Insurance Eligibility Requirements

To be eligible for a redundancy policy, some insurers require you to meet the following conditions:

  • Remain unemployed for a waiting period of 28 or 30 days after becoming redundant.
  • Remain unemployed after the waiting period.
  • Be continuously employed for at least six months before making a claim.
  • Work for at least 20 hours per week.
  • During your unemployment period, you have no other income stream, such as casual or part-time work.

Redundancy Insurance Claim Requirements

When making a redundancy claim, insurers require that you have been employed previously and made redundant.

Often, insurers will also need you to provide supporting evidence of involuntary unemployment. Some examples include a redundancy letter from the company or, if you are self-employed, a notice confirming your insolvency.

In certain situations, you may also be required to prove that you are actively seeking work. For example, you need to register with a recruitment agency or report to Centrelink.

A Guide to Making a Successful Redundancy Insurance Claim

To make a successful claim, will need to follow these steps:

  1. Obtain evidence that you were involuntarily terminated
  2. Make a claim by contacting your insurer
  3. Ensure that the insurer’s claim requirements are met

Your insurer may deny your claim under certain circumstances, such as if you resigned or took a voluntary redundancy package. In these cases, you will not be entitled to make a claim. 

Check with your insurance provider and refer to the relevant Product Disclosure Statement (PDS) for more information on claims and exclusions.

Waiting Period for Redundancy Insurance

The policy’s waiting period is how long you will need to wait before making a claim. This period usually relates to the following:

  • A policy has to be in force for a certain period before you can make a claim. In many instances, this period lasts up to six months.
  • You are involuntarily made redundant and unemployed for some time, usually lasting 30 days. If you have not found a new job during this period, you can make a claim.

How Much Will You Be Covered for?

The monthly benefit payment you will receive from your redundancy cover can be an amount equivalent to your periodic repayments on credit cards, personal loans, home loans and mortgages.

Alternatively, the insurer can pay a portion of your monthly income as part of the policy’s monthly payment.

Depending on the insurer, your benefit will be paid out for a set period, usually three months, or while you remain unemployed, whichever comes first.

Your policy payments will stop once you find new employment.

Will You Still Get Covered if You Apply for Unemployment Benefits or Get a Big Payout?

In general, you can still claim the benefits from your redundancy insurance even when you receive a redundancy payout from your former employer.

While seeking a new job, you can also get financial assistance from the government through welfare agencies such as Centrelink.

Can You Get Redundancy Insurance During a Recession?

Job losses tend to be more common during a recession. While you can still get redundancy insurance, your premiums can become more expensive.

Some insurers require you to hold your policy for at least six months.

Thus, redundancy insurance may not be the optimal solution if you think you will lose your job soon due to a recession.

Other Ways to Protect Your Income Against Unemployment

An income protection insurance policy does not protect you from job loss, nor is it designed to. However, you can opt for alternative products to support your family and lifestyle upon losing your job, including:

  • Redundancy insurance
  • Mortgage protection insurance
  • Credit insurance

Consult a financial expert for advice on what insurance products can help meet your financial situation. Advisers can provide you with quotes based on your personal circumstances and financial objectives.

For more information about other insurance products or insurance available through your superannuation (super fund), ask your adviser or insurer for a financial services guide (FSG) or target market determination (TMD).

An FSG contains helpful information about the entity providing financial services and advice. A TMD is a document describing for whom a particular product is appropriate.

Be sure to transact only with insurance companies with an Australian Business Number (ABN) and an Australian financial services licence (AFSL).

Still not sure where to start, or want help securing the right insurance faster? 

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References

  1. Labour Force, Australia
https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release
  1. Redundancy
https://www.fairwork.gov.au/ending-employment/redundancy
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