Agreed value income protection

What's the difference between agreed value and indemnity value income protection?

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Income protection provides an ongoing monthly benefit payment (up to 75% of your income) in the event you are forced out of work due to serious illness or injury.

There are two types of benefit structures that you can choose from when you apply for income protection:

  • Agreed Value. Payout based on your income at time of application
  • Indemnity Value. Payout based on income at time of claim

Which one is right for me?

This is largely dependant on the nature of your income

Personal situationPolicy typeWhy?
1. Stable incomeIndemnity valueCovers income that's verified at time of a claim.
2. Fluctuating incomeAgreed valueCovers an income agreed to before taking out your policy.
3. Just looking for the cheaper policyIndemnity valueOn average 20% cheaper than agreed value policies.

Receive income protection quotes from these direct brands and apply

Name Product Maximum Monthly Benefit Maximum % of Income Covered Maximum Benefit Period Waiting Period Options
Virgin Tailored Income Protection
5 years
14, 28, 60, or 90 days
Cover up to 85% of your Income (up to $10,000 per month) if you can’t work due to sickness or injury. Cover for 1,000 job types - full-time, part-time and self-employed.
NobleOak Income Protection
2 years or to the age of 65
30 or 90 days
Get your first month free. T&C’s apply. Offer ends 27 February 2020.
Medibank Standard Income Protection
5 years
30 or 90 days
10% discount for Medibank health members.
nib Income Protection
2 years
14 or 28 days
Receive one month's premiums free if you pay annually. T’s and C’s apply.
AAMI Income Protection
2 years
30 days
Get cover up to a maximum of $10,000 of your monthly income.
Zurich Ezicover Income Protection
5 years
30, 60 or 90 days
Get your first month free with Zurich Ezicover Income Protection.

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How do both policy types look when paid out?

This depends on whether or not your income changes

  • Monthly income at the time of application = $1,000
  • Agreed value payout = 75% of monthly income at time of application
  • Indemnity value payout = 75% of the monthly income at the time of claim

What is Agreed Value income protection?

When applying for an agreed value income protection policy you will have to provide proof of income. Your policy and the sum insured is then based on the value of your income agreed upon by you and your insurer. Agreed value policies attract higher premiums than indemnity value income protection cover, which is the main downfall of this particular benefit structure.

What is Indemnity Value income protection?

Under an indemnity value income protection policy, the amount of the monthly benefit you will receive will be based on your gross income at the time you file a claim. Rather than providing financial documentation when you apply for cover, you’ll need to prove your income when you make a claim. This benefit structure comes with lower premiums and is therefore much easier to afford than agreed value cover.

Indemnity value income protection and agreed value: A Snapshot of the pros and cons

1. Agreed Value Income Protection Insurance

  • You know exactly how much your benefit payment will be.
  • Higher premiums than indemnity value cover.
  • If your income decreases after you take out cover, your benefit payment will still be based on your higher income at the time you applied for a policy. You’ll therefore receive an increased benefit amount.
  • If your income increases after you take out cover, your benefit payment will still be based on your lower income at the time you applied for a policy.
  • Suitable for self-employed people, small business owners and those with fluctuating incomes.
  • You will need to prove your income at the time of taking out a policy.

2. Indemnity Value Income Protection Insurance

  • Lower premiums than agreed value income protection cover.
  • If your income has reduced since you applied for cover, you’ll receive a smaller benefit amount.
  • You only have to provide proof of income when making a claim.
  • This type of cover is not suitable for the self-employed or those with fluctuating incomes
  • Other factors can affect the benefit amount you will receive, such as the amount of premiums already paid and the sum insured.

Which insurance funds offer agreed value policies?

Many insurers listed on offer both agreed and indemnity value policy options.

Adviser brands
Agreed value
Indemnity Value
Zurich FuturewiseYesyes
Zurich Wealth ProtectionYesyes

Data taken from brand product disclosure statements on May 2017. Benefits, conditions and amounts are subject to change at anytime.

What types of proof do I need to provide in regards to my income?

The type of proof you'll need to provide will depend on whether your are self-employed or if you are an employee.

Proof type Employee Self-employed
Group certificateYesNo
Personal tax returnYesYes
Personal tax assessment noticeYesYes
Business profit and loss statementYesNo
Business balance sheetYesNo
Business tax returnYesNo
Business tax assessment noticeYesNo

What factors affect income protection premiums?

Income protection insurance is one insurance where you have a lot of control over the premium cost. Unlike most other insurance policies where the offer is basically laid out in front of you and you either accept it or refuse it, income protection insurance has many factors that can adjust that will affect your premium.

Policy choices that will affect your premium

  • The waiting period: is the period you're willing to wait after not being able to attend work because of illness or injury before the monthly benefits start being paid. This period will depend a lot on the amount of sick pay you have owing from your employer, or how much of your savings you're willing to sacrifice before you want the benefits to begin. The longer you can make the waiting period the lower will be the premium cost.
  • The benefit period: Another decision you'll have to make will be the amount of time you want the benefits to continue while you remain incapacitated. Some people only choose a year or two, others to age 60 or 65. When making this decision you should keep in mind that it is for protection against long term illness that you are taking the cover out for in the first place. However, the shorter the benefit period the lower will be the premium cost.
  • Agreed or indemnity value: As previously mentioned, agreed or indemnity value, depending on which you type suit your situation better, will have an impact on how much your premium rates will be. Agreed value is the amount agreed on when taking out the policy based on your proven earnings at that time. Up to 75% of this amount is what you'll receive no matter what you are earning when you make a claim. While on the other hand, indemnity policies will insure you for what you say you earn when you first take the out policy but when you make a claim you'll have to verify what you are then earning. You'll then receive up to 75% of that amount. Out of the two options, agreed value is generally more expensive than indemnity value.

Personal circumstances that will affect your premium

There are other factors that will determine the premium price, these include:

  • Age: As with all life insurance type policies, they get more expensive as you get older.
  • Gender: Women tend to pay higher income protection premium rates compared to men.
  • Nature of your occupation: If you primary occupation is considered to be high risk, you will pay higher premiums than those who work in an office environment.
  • Lifestyle: Individuals who don't smoke and/or consume alcohol in moderation will pay cheaper premiums compared to those who smoke and/or drinks regularly.
  • Current health condition: If you generally are in good health and have no pre-existing medical conditions, your premiums will be cheaper compared to those with poor health.

Are both available through superannuation?

Many superannuation funds only offer indemnity value cover inside super, so if you decide you want agreed value income protection insurance, you may need to take out a policy with an outside retail provider. This is due to clauses in the Superannuation Act which stipulate that the amount released from your super can never be more than the amount of income you were earning prior to becoming temporarily incapacitated.

So if you have an agreed value benefit amount and your income is reduced in the meantime, you will only be paid the lower amount when you claim, with the remainder being held in your super. In this case, the main advantage of having agreed value cover is negated and you may as well have an indemnity value policy providing the same benefit for less cost.

Why should I get an income protection insurance policy?

People encounter problems that keep them from functioning and working, which is not covered by regular life insurance. Income protection insurance can help:

  • The family breadwinner. If you provide the main source of income in the family, income protection helps you protect your whole family's quality of life.
  • People who don't have enough savings. If you are unable to serve your on going costs when unable to work, income protection insurance will come in handy.
  • People who are paying off debts. If you have mortgages or loans to pay off, income protection can help maintain payments during an injury or illness.

How to choose your income Protection Plan?

The best way to decide which type of insurance policy works best for you is determined by your needs and what you can afford. Income protection coverage can come in many forms, ranging from basic coverage to premium coverage. Contracts vary from one insurance company to another, and can also change depending on the occupation of the person that it will insure. It is in your best interest to weigh all your options before signing up for a policy.

Here are some things you will need to consider as well:

  • How much can you afford to pay in premiums? Remember, the goal of income protection is to make sure you will not be in a financial hardship should something happen to you, and that includes not having problems paying the premiums.
  • What sort of causes of illness or disabilities are covered? You don’t want to be paying premiums only to find that when you claim you can’t receive a payout.
  • Are there any additional benefits to the policy that I will be getting, aside from the benefit payout?
  • After the first day of being off from work, how long do you have to wait before you can file for the claim? How long can you survive without the benefit, based on your paid leave days and rainy day savings?

These considerations will give you a clearer idea of what sort of income protection insurance you should sign up for.

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