Insuring unemployment isn't a financial disaster

In the world of salaried employment, there can be few more chilling phrases than "... we've decided to let you go". After the initial iced water flush of fear, the financial abyss opens up beneath your feet and you fall into it. And if you haven't previously organised various financial safety nets, you'll keep falling until either you're rescued by a new employer or else you hit the bottom.

The first safety net you should have in place is three months' net salary (that's after Alistair Darling has taken his cut) sitting in a high interest deposit account that you've topped up to keep pace with inflation and rising interest rates. But in a country mired in personal debt, this is rather a glib instruction, as most members of what we're now refer to as the "coping classes" find it hard to meet the expenses of everyday life, let alone have any surplus to squirrel away for a rainy day. But if you can spare the cash, it acts as an immediate safety net that catches you before fall too deeply.

Payment protection insurance

Even with cash sitting on deposit, most people construct their financial safety net with various types on insurance. Many people who have personal loans or credit cards have probably paid for payment protection insurance (PPI), which theoretically covers the payments if you can't. However, there are some major exclusions they never seem to tell you about when you sign on the dotted line.

The first is being self-employed: it won't pay out on the grounds that, technically, you can't be made redundant in the same way as a salaried employee. The second exclusion is people who work on contracts, even though they're salaried employees and pay PAYE - not having the contract renewed doesn't count as redundancy (even though it may feel like it).

There are so many nasties lurking in the small print of PPI policies that no less an august body than the Office of Fair Trading says only around 20% of insurance claims on these policies are successful. Even the chocolate teapot that is the Financial Services Authority has called on firms to take urgent action to ensure that their selling practices for PPI are in line with regulatory requirements, as FSA "mystery shoppers" uncovered poor selling practices and a lack of proper compliance controls among a sample of firms.

Mortgage Payment Protection Insurance

The other insurance many will have been sold (it's rarely bought) is Mortgage Payment Protection Insurance (MPPI) which promises to make repayments on your mortgage in the event of accident, sickness or unemployment (it's also often erroneously called ASU cover - but it's not; well find out what ASU really is further down).

Could you keep up your mortgage payments if you lost your income through accident, sickness or unemployment? Check out how to protect your mortgage payments here.

According to the Council of Mortgage Lenders, the average cost of MPPI is now around £4.95 per £100 of mortgage payment. According to the latest Woolwich Mortgage Affordability Research (April 2007), the average monthly mortgage payment in England and Wales was £590. So if we take those two averages, it follows that MPPI will cost £29.50 a month, or £354 a year or a staggering £8,850 over the 25-year mortgage term. And remember - that's an average.

As we've seen, it can be expensive; and, again, there are caveats. There's generally an initial waiting period of between three to six months before you can make a claim and, when you do, 30 to 60 days before the policy coughs up; the good news is that most have what they call a "back to Day One" clause which means that, when they do pay out, the benefit is backdated to cover the waiting period.

Also, in these days of high property prices and concomitant massive mortgage multiples, some people's monthly repayment will be chunky, but practically all MPPI policies limit the monthly payments covered, often to £1,500 or £2,000 per month, so if your monthly mortgage commitment is huge, even if the policy pays out, it might not cover the payment. Finally, most MPPI policies only last a year, so the maximum payout is twelve times your repayments. If we take Woolwichs average monthly mortgage payment of £590, the policy will pay a total of £7,080. As large as this sum is, you might ask yourself whether it's better to cover the first three mortgage payments from your mythical three months' salary on deposit.

But these policies just cover what they say they will: either your credit card and loan payments, or your mortgage. But what about the awe-inspiring ever-escalating expense of Council Tax? The rising price of the weekly supermarket shop? The cost of filling up the car's petrol tank? The utilities bills that just seem to grow out of all proportion to your dwindling consumption of them (you're trying to save the planet, after all)? That's when you need redundancy insurance.

28 February 2008 © Moneyextra.com

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