Policy Types

When deciding on an income protection policy, two policy types are available – you will need agreed value policies and an indemnity value policy. There are several differences between the two policies which you will need to be aware of before deciding on which policy type works best for you.

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  • Cover up to 75% of Your Income
  • Tax Deductible Premiums
  • Flexible Waiting and Benefit Periods
  • Multiple Policy Options Available
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Indemnity Value

Indemnity Value policies are type of income protection which can still cover you for up to 75% of your monthly income however you are not required to provide proof of income at the time of the policy application.

Generally this means indemnity policies are cheaper than agreed value policies.

As these types of policies do not guarantee your monthly benefit, if your income reduces between the time of your policy and the time of your claim, any monthly benefit paid out to you will be adjusted accordingly.

Who does an indemnity policy suit?

There may be a number of reasons why you take out an indemnity policy:

If your income is relatively stable and you don’t foresee a reduction in your income in the foreseeable future, you may want to consider an indemnity policy.
In order to get an agreed value policy, you need to provide proof of your income in the form of pay slips. If you are unable to do so, your only option may be to take out an indemnity policy.
Agreed value policies are generally more expensive than indemnity policies, sometimes by as much as 20%.

How is my monthly benefit calculated if I go on a claim?

When calculating your monthly benefit your insurer will work out the lesser of:

  • The monthly benefit insured according to the policy schedule; or
  • 75% of the life insured’s pre–disability income

How do I prove my pre-disability income?

For indemnity policies, you will need to prove to your insurer your pre-disability income. You will be required to provide proof of:

  • Your previous 12 months income; or
  • Your best consecutive 12 months of income over the past 2 years; or
  • Your best consecutive 12 months of income from previous 3 years

The exact definition of what you need to provide will be outlined in the Product Disclosure Statement (PDS).

Proof of income for employees:

Group Certificate
Tax Return
Tax Assessment Notice

Proof of income if you’re self employed:

Business Profit and Loss statement
Business Balance Sheet
Business Tax return
Business Tax Assessment notice
Personal tax return
Personal notice of tax assessment.

Case Study

Robert is a self employed plumber and sole earner in his household. He decides that he needs to take out an income protection policy to protect his family in the event he suffers from a sickness or accident and is unable to work.

Robert’s personal exertion income after business expenses at the time of his policy application is $100,000 per year or $8,333 per month, which he proves by showing tax returns from the previous two years.

Robert decides to go on an indemnity style policy where his income is not agreed, meaning any reductions in his income will reduce his monthly benefit.

Five years after taking out the policy Robert suffers an injury requiring him to take time off work and lodges an income protection claim.

Unfortunately for Robert, business has been difficult over the past 5 years and his yearly personal income after business expenses had dropped to $80,000 for the previous 12 months, or $6,666 per month.

As his income has dropped and his benefit not guaranteed, his monthly benefit is reduced to $5,000, which is 75% of his monthly income, a decrease of $1,250 a month or $15,000 a year compared to his salary at the time of the policy application.

Monthly Benefit and Agreed Value Comparison

Monthly Benefit if Indemnity Policy 7500AUD
Agreed Value Monthly Benefit on Policy Schedule 9375AUD

Agreed Value

Agreed Value policy types also protect up to 75% of your income however you can agreed on your monthly benefit at the time of your application time, protecting you against any potential reductions in your income.

What is my income based on?

Your income will generally be passed on your previous 2 years worth of income – which you will generally be required to prove.

As the monthly benefit in agreed value policies is agreed at the time of the policy application, any changes in your income will not affect the monthly benefit.

Who does an agreed value policy suit?

You may suit an agreed value policy if:

Your income fluctuates

If your income fluctuates regularly you may want to lock it in at the time of your application in case it decreases.

What do I need to provide to prove my pre-application income

For Agreed Value policies, you will generally need to provide your life insurance company with your last 12 – 24 months income.

The exact definition of what you need to provide will be outlined in the Product Disclosure Statement (PDS).

Proof of income for employees:

Group Certificate
Tax Return
Tax Assessment Notice

Proof of income if you’re self employed:

Business Profit and Loss statement
Business Balance Sheet
Business Tax return
Business Tax Assessment notice
Personal tax return
Personal notice of tax assessment

Agreed Value Case Study

Peter is an account manager at a large software company and decides to take out an income protection policy in the event that he is unable to work due to a sickness or accident.

Peter’s pre-disability income at the time of his policy is $180,000 per year or $15,000 per month. Peter decides to take out an agreed value policy – giving him a monthly benefit of $9375, which is 75 per cent of his $15,000 monthly income.

Several years later Peter loses his job and is forced to take a new job, paying $120,000 per year or $10,000 per month. Shortly after he starts his new job, Peter contracts an illness and is forced off work as a result.

Due to his policy, Peter is able to receive a monthly benefit of $9375 a month as his monthly was not affected by his reduction in income.

Eligible Monthly Benefit at time of Claim 5000AUD
Monthly Benefit on Policy Schedule 6250AUD

Guaranteed Agreed Value

Select Insurers may offer a third policy type, called guaranteed agreed value if you provide proof of income at the time of your policy application.

Published: August 28, 2015

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