cash clinic: how to protect your family as threat of redundancy looms
19th June 2010
The Scottish private client team at HBJ Gateley Wareing answer your queries, this week: how to protect yourself against the financial implications of losing your employment income.
Q I work in the financial services industry and my employer has made a number of redundancies in recent months. I am becoming increasingly concerned that I could be next in line. With two children of school age, I am concerned how this would affect my family. Could you advise me on measures I could take to protect my family financially?
A The financial implications of losing employment income are immediate and normally severe, albeit the impact can be delayed by any redundancy package received.
It is possible to insure against the effects of redundancy, using payment protection insurance (PPI). This aims to cover monthly loan repayments for a fixed period of time following redundancy, although it can also cover a reduction in income due to illness. It is normally offered by a mortgage or loan provider when the loan agreement is being put in place; however, it is possible to shop around for cover elsewhere.
PPI policies include a number of exclusions which would prevent a claim. For instance, cover is not normally offered to individuals on a temporary employment contract or those who are aware that they may be made redundant.
Where cover is in respect of a mortgage or personal loan, payments are made directly to the lender. Normally the maximum number of monthly repayments is 12, although some policies extend to 24.
PPI can also cover for credit card repayments, typically paying a percentage of the overall balance or the minimum payment required for 12 months. Cover is based on the outstanding balance at the point the claim is made, not any subsequent borrowing.
Cover provided varies from policy to policy and care should be taken to ensure that the chosen policy is suitable for purpose. It is also important that an individual is fully aware of the costs of PPI, especially if it is included as part of an overall loan package. The cost should be detailed separately from the cost of the loan and be shown over the life of the policy.
Premiums for monthly payable policies can be varied by insurers, normally after a notice period of 30 days. Where the cost increases significantly some policyholders may find PPI becomes unaffordable and will have to cease premiums and lose cover altogether.
Shopping around in these circumstances may not be the answer as most policies have a wait period of at least 30 days between the start date and when a claim can be made. Therefore someone could find themselves without cover if they lose their job within this period.
But be sure to shop around – this form of insurance is complex and subject to an ongoing review by the Financial Services Authority due to widespread misselling. Standalone providers tend to offer more competitive deals than PPI sold alongside loans by banks and credit providers.
Stephen Hall is a wealth manager within the private client and financial services division of HBJ Gateley Wareing.