Q. I have been looking for an Income Protection policy that provides cover if I cannot work as a result of unemployment.  Does this exist?  My existing Income Protection policy only provides a benefit in the event of sickness or accident.

A. The primary role of Income Protection is to provide a monthly income benefit in the event of temporary or permanent disability as a result of sickness or accident.  Redundancy insurance is generally offered as an additional benefit with Mortgage Protection Insurance policies.  Mortgage Protection Insurance covers your mortgage payments in the event of sickness or accident, but not your income.  I have never seen unemployment insurance offered as a stand alone policy.

In September 2012, Virgin Money Australia released an Income Protection policy that offers Redundancy Cover as an extra benefit for an extra 20% premium.  The Redundancy benefit is payable for being unemployed but only covers those who were “dismissed through no fault nor choice of their own and unexpectedly” and are actively seeking work. The benefit payment is capped at $3,000 per month for up to 3 months only.

Whilst this added benefit may appear attractive, you really need to assess the overall policy on its merits and compare to other offerings in the market and make sure you are comparing like for like.

Having reviewed the fine print, the Virgin policy excludes anxiety, stress, depression, emotional or behavioural disorders”.  Mental health is the 3rd largest area of claim for Income Protection in the industry.

Whilst they refer to the cover as being guaranteed.  Pre-existing conditions are excluded for 5 years prior to commencement of the policy.

Benefits are also limited to either 2 or 5 years compared to up to age 65 being available in the market.

As an alternative to Redundancy cover, I would recommend saving sufficient funds in an emergency fund to replace income in the event of unexpected periods of unemployment.  We would recommend around 3 months nett income which is the same as the maximum benefit offered by this policy.  Remember that when you are made redundant you have rights to receive a Redundancy benefit provided you work for an employer with greater than 15 employees.

 

Follow Andrew on Twitter @AndrewHeavenFP.  This article was originally published in The Australian.