Is Unemployment Insurance Worth It?

With the rising cost of living and companies downsizing, income protection insurance is starting to get much attention.

Income protection is a long-term insurance policy that ensures a?regular monthly income?until you retire or can return to work.

Broadly there are two types income protection insurance

1. Accident & Sickness cover (AS)
2. Accident, sickness and unemployment cover (ASU)

As unemployment cover is always sold as a bolt-on to accident & sickness insurance, in this article, we'll explore whether the ASU cover is worth it.

Unemployment and Long-Term Sickness Absence in the UK

Long-term sickness absence is usually defined as?a period of continuous absence of more than four weeks

In a given year, (note: different years of data is used for LTSA and unemployment)

• 1M people are off work due to long-term sickness
• 1.35M people are unemployed

The length of each of those is listed below --

It does flag the need for insurance as unemployment or falling sick can last months.?

AS and ASU compared

1.Application

An important distinction between AS & ASU is the application process (i.e. underwriting).

• AS policies?are?fully medically underwritten; it will take into account your previous medical history before offering policy terms and a final price.
• ASU?policies, on the other hand, will?exclude?pre-existing medical conditions?and most?back & stress-related conditions.

The ASU application process is a concerning one for two reasons -

1. 35-45% of accident & sickness claims tend to be for musculoskeletal & mental health conditions; however they tend to get excluded from the ASU policies
2. 30-40% of people tend to have medical disclosures, which would, unfortunately, exclude them from getting ASU policies.

Claim statistics from LV= for 2021 for a product mainly sold to?white-collar workers.

Claim statistics from LV= for 2021 for a product mainly sold to?blue-collar workers.

Although ASU cover, in principle, does have higher chances of claiming (unemployment + sickness & accident), it filters out the vast majority of customers or excludes claims for some of the most common conditions for which you'd be off work. i.e.

1. Only 60-70% of people will be eligible to get a cover
2. 55-65% of the claims will be rejected

2. Policy terms

For this purpose, I have used LV= for AS and National Insurance for ASU

ASU cover offers a watered-down version of the cover for unemployment and a highly restrictive cover for sickness. Notable disadvantages include -

• Cover terms and prices are reviewed every year.
• Insurer's discretion to cancel the cover at any time
• Highly restrictive conditions for sickness claims
• Cover amount and term are limiting (it's noteworthy to mention that ￡2000 is sufficient enough for 75% of the working population)
• No fringe benefits (death cover, fracture cover...)

3. Premiums

Given the natural appetite for insurers to attract specific risks, I used an average of three insurers' premiums for each insurance category to make a fair comparison.

It is important to note,

1. Maximum claim period: ASU policies will not pay any claim past 12 months, whereas AS policies can pay up to state pension age (68).
2. Waiting period: The number of days before you become eligible to claim can either be from day1 or 30 days with ASU policies, whereas with AS, it tends to be 30 days or more
3. Premium review: ASU policy premiums get reviewed yearly, whereas AS premiums are fixed/guaranteed for the entire duration of the policy.

Considering that,

Insurance premium for a benefit amount of ￡1500 for a 30 year old white-collar worker

Insurance premium for a benefit amount of ￡1500 for a 30 year old blue-collar worker

As expected, the Premiums of AS cover tended to be lower than those of ASU. However,

1. They were considerably lower for white-collar workers even when compared with a policy that pays a benefit amount until age 65
2. For Blue collar workers, it tends to be lower for a 12 months benefit period but creeps up to a much higher premium for benefits that last until age 65

It is important to note here that the premiums of ASU cover will go up with age and at the discretion of the insurers.

Conclusion

Although the chances of falling ill or getting unemployed seem equally likely, the insurance option available for unemployment is sub-standard and substantially more expensive.

Even more, by choosing a cover for ASU, one isn't getting a good deal either for unemployment or sickness benefits.

With guaranteed premiums, more inclusive policies and the option to get a benefit payout for a much longer duration, Accident & Sickness cover are more protective and better value for money.