You’ve decided it’s time you protect your quality of life and your family’s financial security by investing in an income protection policy. Now the question becomes what type of income protection will provide you with the best rates and more importantly meet your requirements.
Compare Quotes for Agreed or Indemnity Value Income Protection
- Cover up to 75% of Your Income
- Tax Deductible Premiums
- Flexible Waiting and Benefit Periods
- Multiple Policy Options Available
When taking out an income protection policy, your cover will be based on your income. The primary difference between agreed value and indemnity income protection is in how your monthly benefit gets calculated. Agreed value calculates your cover based on your income at the time of application, whereas Indemnity calculates your income when you claim.
Difference Between Agreed and Indemnity Value Premiums
|Gender||Occupation||Age||Agreed Premium||Indemnity Premium||Premium Difference (%)|
The above illustration is based on non-smoker based in NSW, with a monthly benefit of $3,125 with a 30 day waiting period, and a benefit period to age 65.
Agreed Value Pros & Cons
|Protects up to 75% of your income, as you agree on your monthly benefit at application time.||As indicated by the illustration above, Agreed value policies cost relatively up to 20% more than an indemnity policy because you’re locking in that monthly benefit.|
|Provides you with certainty against possible future income reductions that your monthly benefit will not reduce should you go on claim.||The financial evidence is required during application stage, or (shortly thereafter) and any other stage, you wish to increase your cover amount.|
|At claim stage you would not need to send in your financial statements, thus making the claims process quicker.||The evidence supplied during application stage must be provable and confirmed.|
To receive true guaranteed agreed value, you need to present your financial statements at application stage and receive the insurers’ stamp of approval. Meaning the insurer has to verify your financial statements as fact, that your policy will meet the income benefit amount you want to protect.
‘Endorsed’ or ‘Guaranteed’ are new terms used by select insurers to confirm you have provided financials at application time to justify your monthly benefit. Please note only a handful of insurers use these terms, and most will require financials for an agreed value policy at application time, so be aware.
If you have not provided financials proving your application income, and subsequently go on claim before you have provided the pre application proof of income, then you will need to provide this at claim time, and some may convert to an “indemnity” style benefit calculation. Therefore it is essential if you need an agreed value policy to send in your pre application proof of income at the time of application.
The definition of temporary incapacity under superannuation law is more closely aligned with an ‘indemnity’ policy definition. Therefore select insurers only allow for indemnity policies when the policy is held inside a super fund, therefore if you need the certainty of an agreed value policy (and the benefits it provides) however need an alternative to personally funding the policy from your personal money you can “split” the policy ownership of your policy where you have part of your policy personally owned and the balance owned by your super fund.
If you are unable to prove your income for the last two years prior to taking out a policy, then generally you can only choose an indemnity policy. For example, you’ve just changed careers or started your own business.
Indemnity policies are well suited for people with a stable income and unfortunately the only option for those who do not have the financials to back up an Agreed Value policy or if you want cheaper premiums.
Indemnity Pros and Cons
|Indemnity is the cheaper option with relatively lower premiums.||It’s cheaper because the payout is potentially less. It will pay the lessor of 75% of your pre-disablement income or the monthly benefit listed on your policy schedule.|
|It requires a relatively simple application process because you do not need to provide detailed proof of income when applying for the policy.||The claims process can take longer as you need to go through both the medical side of the claim and the financial justification side of proving your pre-disablement income according to the policy requirements.|
|This risk might be acceptable for an employed person who maintains a stable income and receives year-on-year increases.||Any drop in your income will allow the insurance company to potentially reduce the monthly benefits you’ll receive at claim stage.|
We understand that indemnity is cheaper, however not all indemnity policies are the same. You need to look at the pre-disability income clause, also referred to as ‘pre-claim’ income.
Income Protection for self employed
Having an agreed value income protection policy is generally the preferred option, however if you’re self-employed and are currently unable to attain an agreed value policy, then your only other option is an indemnity policy, but make sure you choose one of the more flexible options, like the 2 to 3 years pre-claim.
You generally need two years of financial evidence when applying for an Agreed Value policy and to claim on Indemnity policy one of the above 3 options will apply.
Proof of income documents for Income Protection benefits
The proof of income your insurer requires will depend on your work status, whether you are self-employed or permanently employed by a company.
|Personal tax return||✓||✓|
|Personal tax assessment notice||✓||✓|
|Business profit and loss statement||✗||✓|
|Business balance sheet||✗||✓|
|Business tax return||✗||✓|