Contingency funds are more effective against sudden decline in income

Job loss covers have conditions attached

Millions have lost jobs or seen drastic reduction in income since the start of the pandemic. Many people seek financial products that could help them deal with a sudden drop in income. While insurance policies that offer coverage against job/income loss are available, they come with many exclusions and conditions attached.

Highlighting the need for protection, Sajja Praveen Chowdary, head (motor insurance) and new product lines, PolicyBazaar.com, says: “Middle-class salaried and self-employed people need options to safeguard themselves from sudden financial shocks as they tend to have liabilities, like EMIs.” PolicyBazaar recently set up a separate vertical that offers insurance products that provide protection against job/income loss.

What’s available: In India, standalone policies covering job/income loss are not available. This feature could be available as part of a policy bought for coverage against critical illness, personal accident, home insurance, health insurance, and so on, or it could be available as a rider that one can buy with some of these policies.  

This benefit is usually paid out under two conditions: One, where a person has lost his job/income due to termination, lay-off or retrenchment; and two, where the person has lost his job/income due to disability or death. The cost of a rider ranges from a few hundred to a few thousand rupees.

Beware of exclusions: Most of these policies, however, come with exclusions you need to be aware of. Adhil Shetty, CEO of BankBazaar, says: “In most cases, the income-protection clause is triggered only with the rest of the policy. For instance, a health cover will typically provide income protection only if the policyholder is unable to continue working due to ill-health”. It won’t consider you eligible if job loss happens due to a pre-existing disease.  

Sometimes, job loss is defined narrowly. Some plans may cover you only if the job loss resulted from a merger or acquisition. Some won’t cover you if you resigned, faced disciplinary action, were removed due to poor performance or during probation, or retired early. Some policies come with a waiting period of one-three months.

Questions to ask about job/income-loss cover

• What is the waiting period before the policy kicks in?
• Will the claim be honoured if the employer offers severance pay?
• What happens if the insured doesn’t have written proof of retrenchment?
• What happens if income loss is due to a pre-existing disease?

Accident-related policies compensate you for job loss only under certain conditions. Shetty says: “Most such policies cover for job loss only if the policyholder has a permanent or partial disability or death.”

Build an emergency corpus: The benefits from these policies are also often inadequate. Hence, experts suggest it is better to save instead of relying on an insurance cover. Melvyn Joseph, founder, FinVin Financial Planners says: “Once you get a job, your first priority should be to gather an emergency fund.”

A single-income family, according to him should have an emergency corpus that will cover at least 12 months of living expenses, plus EMIs, while a double-income family may manage with six months. At the same time, he emphasises that one must have a few essential policies. Joseph says: “Every earning person should have a separate term insurance, family floater health insurance, and a personal accident policy covering all types of disabilities.” 

The bottom line is that you should not aim to buy an insurance cover just against job or income loss. Buy the key insurance policies mentioned above. If one of them has a job- or income-loss protection feature, avail of it.