Agreed Value vs. Indemnity Income Protection

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.

What is Agreed Value Income Protection?

An agreed value income protection policy is where your monthly benefit is determined by your financials provided during application stage, thus providing you more certainty that the benefit amount will be as expected. Best suited to people with fluctuating incomes that can prove their income, like being self-employed or having a career that has ‘good’ and ‘bad’ months.

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.

Can you have Agreed Value Income Protection in super

Yes. However, where an ‘agreed value’ policy is taken inside super, and a claim benefit exceeds the allowable benefit payments under the narrower super definition of ‘temporary incapacity’ an amount may be preserved in the super fund until another condition of release is met, for example, retirement.

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.

What is Indemnity Value Income Protection?

An indemnity value income protection policy is not fully financially underwritten during application stage, but rather requires you prove your income at claim stage. Thus, increasing your risk of receiving less of a payout than the insured benefit, if you are unable to provide undeniable financial proof according to the policy.

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.

Previously, indemnity policy claim payouts would be based on what you earned for a consecutive 12 months before the sickness or injury. Some insurers are now looking at the best 12 consecutive months over the last two years before you sustained your accident or illness and stopped working. A handful is looking at the last 3 years.
Thus, selecting an indemnity policy that has this type of flexibility will be far more beneficial. For example, a policy option that considers your best 12 consecutive income months in 3 years will provide you more certainty that your maximum monthly benefit amount will be paid out, which is why it’s so important you know which option your insurer is basing your income one.

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.

RequirementsEmployeeSelf Employed
Group certificate
Personal tax return
Personal tax assessment notice
Business profit and loss statement
Business balance sheet
Business tax return
Published: March 4, 2018
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