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Unemployment insurance is a type of income protection insurance policy. It is often referred to as employment protection insurance or work insurance.

This type of cover provides financial security if you become unemployed due to redundancy. In this situation, your insurer would step in and pay you a monthly income.

Read more about income protection insurance

You take out a policy and pay premiums each month. In return, you can make a claim if you become unemployed providing that:

• You are not at fault for your unemployment

• Monthly premiums have been paid on time

• The initial claims exclusion period has run its course

When you make a claim, you usually need to provide proof of identity and address, along with evidence of your income such as payslips or confirmation from your previous employer. You may also need to list any financial commitments, including a mortgage, rent payments or dependents.

If you're employed with a business, it's always a possibility that you could lose your job, whether it's because of external economic factors or a change in the business’s priorities.

And if you've not been able to save up for an emergency fund to get you through periods of unemployment, then unemployment insurance could help you through the lean times.

This is especially useful if:

• You have a mortgage, or other debt to repay

• You have children

• Your emergency fund isn't enough to cover all your bills

The amount of income protection you need depends on your monthly outgoings, including things such as mortgage or rent payments, credit card payments, utility bills and food costs.

If you add up all of this, you can calculate how much protection you need to survive while you're unemployed.

When working out how much you need, it's worth bearing in mind that the point of income protection is not to improve your financial circumstances but to get you through a difficult period and cover your most important expenses.

This is the reason insurers only pay out a percentage of your income – often up to 65%. Plus, the lower the level of cover you ask for, the lower your premiums will be.

Levels of cover

There are two main types of unemployment cover:

• Level cover: your payments and premiums are fixed for the term of your unemployment insurance policy

• Inflation-linked cover: your payments and premiums increase each year, in line with inflation, until your policy ends