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.
As with all insurance choices, the type and level of cover you need will depend on your personal circumstances and financial priorities. The cover type will be different for people who are employed by companies, and those who are self-employed. Generally, you’ll have two options; Agreed value or Indemnity income protection.
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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 (%) |
|---|---|---|---|---|---|
| Male | Accountant | 35 | $36.95 | $29.56 | 20.00% |
| Male | Accountant | 40 | $49.87 | $39.90 | 19.99% |
| Male | Accountant | 50 | $111.75 | $89.40 | 20.00% |
| Male | Clerk | 35 | $50.96 | $40.77 | 20.00% |
| Male | Clerk | 40 | $68.78 | $55.03 | 19.99% |
| Male | Clerk | 50 | $137.31 | $117.81 | 14.20% |
| Female | Accountant | 35 | $57.69 | $46.15 | 20.00% |
| Female | Accountant | 40 | $78.19 | $62.94 | 19.50% |
| Female | Accountant | 50 | $170.97 | $141.46 | 17.26% |
| Female | Clerk | 35 | $78.06 | $63.66 | 18.45% |
| Female | Clerk | 40 | $101.63 | $82.88 | 18.45% |
| Female | Clerk | 50 | $222.84 | $187.81 | 15.72% |
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
| 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 the possibility of future income reductions. Thus ensuring your monthly benefit will not reduce should you claim. | The financial evidence is required during application stage, or (shortly thereafter) and any other stage, you wish to increase your cover amount. |
| The claims process is quicker because you do not need to send in your financial statements when lodging a claim. | 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 did not provide financial proof of your income at the application stage, you would have to provide these financials at the time you submit a claim. Some insurers may convert your policy to an “indemnity” style benefit calculation. Therefore, if you need an agreed valued policy, it is essential you provide 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.
However, if you need the certainty of an agreed value policy (and the benefits it provides) and need an alternative to personally funding the policy, you can “split” the policy ownership of your policy – 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 before 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. It is also the only option for those who do not have the financials to back up an Agreed Value policy or want cheaper premiums.
Indemnity Pros and Cons
| Pros | Cons |
|---|---|
| Indemnity is the cheaper option with relatively lower premiums. | It’s cheaper because the payout is potentially less. It will pay the lesser 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. 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.
| Requirements | Employee | Self Employed |
| Group certificate | ✓ | ✓ |
| Personal tax return | ✓ | ✓ |
| Personal tax assessment notice | ✓ | ✓ |
| Business profit and loss statement | ✗ | ✓ |
| Business balance sheet | ✗ | ✓ |
| Business tax return | ✗ | ✓ |