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What Is Involuntary Unemployment Insurance?

Mary McMahon
Updated May 16, 2024
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Involuntary unemployment insurance provides coverage to pay debts in the event that someone becomes unemployed. It may be packaged with a loan or offered as an extra rider on a service like a credit card. In addition, consumers can consider options like income protection insurance, to kick in if they can no longer work, and payment protection, which can cover or suspend payments during periods of involuntary unemployment. The best option can depend on the type of debt and the situation. Insurance agents may have more information.

With this product, people pay a set amount for a monthly premium. They may need to hold the insurance for a certain number of months before it becomes effective, a tactic designed to prevent people from buying insurance right before a period of involuntary unemployment. If an employer makes layoffs, the insurance can provide some money to cover monthly payments on debts like mortgages, credit cards, and car loans.

Some coverage is tied to a specific loan and the payments may go directly to the financial institution. In other cases, involuntary unemployment insurance pays out to the consumer, who can decide how to apply the money. Payment protection plans may wipe out balances altogether on credit cards, appliance credit, and other debts with relatively low balances. Usually there is a waiting period before insurance payments will be issued, which makes it advisable to have some money in savings to cover expenses for a few months.

Before insurance companies will pay out, they typically require proof that employment is truly involuntary, and isn’t excluded from coverage. Someone who quits or is fired because of negligence or contract violations does not qualify. Falsifying documentation to access involuntary unemployment insurance can result in fines and other penalties, because it is a form of insurance fraud. While collecting insurance, people may also be eligible for unemployment benefits through government agencies.

Time periods covered by involuntary unemployment insurance can vary; most plans last only a few months. At this point, borrowers who have not been able to find work may need to communicate with the lender. This can include a request to suspend payments, forgive part of the debt, or negotiate monthly payments down. Hardship deferments may be available on some debt to help people remain in good standing while they deal with problems like unemployment. The terms of the insurance policy should be read carefully to understand what is covered, and for how long.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By clintflint — On May 21, 2013

@MrsPramm - It's not always tied to the bank, you can get pay outs for your own benefit as well if you can't work and you need money to survive.

And I think most of the time the amount the bank expects for the insurance is quite small, but that's something that everyone has to decide for themselves of course.

Insurance is such a dangerous game, because it can be hugely expensive (just look at health insurance) but if you get caught without it, you can end up in serious trouble.

I've been thinking lately it might be a good idea to get this kind of insurance, even though I don't have anything that needs regular payments (aside from rent, of course), just because I've heard too many horror stories from friends of people who ended up homeless because they were laid off and couldn't find a new job in time.

By MrsPramm — On May 20, 2013

@pastanaga - I just don't like the fact that it's involuntary. I mean, there's no reason the bank can't just take the house if they aren't getting paid.

It just seems like it's another way for them to squeeze money out of you, because whether you lose your job or not, they are going to get extra money.

And if you aren't getting this insurance, well, they'd get the house, so it's not like they'd lose anything in that case.

I think it's a great idea for people to get this if they need extra reassurance that they aren't going to be thrown out on the street if they get a work injury, but I don't think it should be compulsory.

By pastanaga — On May 20, 2013

I know my mother had to get this as a condition of her mortgage and I imagine when I get one I'll have to as well.

It's really good for peace of mind, since I can imagine all kinds of things that might make it difficult or impossible to work and most of those things would be stressful enough without having to worry about losing your home out from under you as well.

It's a little bit extra a week I think, but if you can't afford that little bit extra, you probably can't afford to buy a house in the first place.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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