What exactly is indemnity value income protection insurance?
There are two types of benefit structure that you can choose from when you apply for income protection:
- Agreed value
- Indemnity value
Under an indemnity value income protection policy, the monthly benefit you'll receive is 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.
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Indemnity income protection insurance vs agreed value income protection insurance
Here are the key differences:
- Indemnity value policy. You will receive a monthly benefit that is based on your gross income at the time you file a claim.
- Agreed value policy. These are based on the income you and your insurer agree upon when you apply for a policy.
Indemnity value vs agreed value: How does it look when paid out?
This is how a policy payout looks based on the following assumptions:
- $1,000 monthly income at the time of application
- 75% of income is paid out
When do I need to produce evidence of my income?
With indemnity income protection insurance you need to provide proof of income when it comes time to make a claim. Meanwhile, agreed value policies require you to provide financial documentation when you apply for cover.
Which is cheaper?
Indemnity value policies attract lower premiums than agreed value policies, making them more affordable for a wide range of people. With indemnity income protection cover, your benefit amount is obviously based on your income when you make a claim.
If your income has been reduced since you applied for cover, you’ll receive a reduced benefit amount. However, if your income has increased since you took out your policy, the benefit amount you receive will reflect that rise.
Is an income protection insurance policy right for me?
Indemnity value income protection cover is generally more suitable to applicants who:
- Can prove their most recent income easily. You’ll need to provide the necessary financial documentation as required by your insurer.
- Work at a larger company that provides regular payslips. You may need to provide proof of income in the form of payslips at the time of making a claim.
- Are after cheaper premiums. Indemnity value policies can offer lower premiums.
- Those with stable incomes. As your income rarely fluctuates, there isn't as much need for an agreed value policy.
What about agreed value policies?
Agreed value cover is often better suited to those with fluctuating incomes. For example, self-employed people or small business owners typically bring in a greatly differing amount of money from one month to the next, so an agreed value policy offers security and protection against the possibility of a decrease in income.
Which insurance funds offer indemnity value policies?
Many of the insurers listed on finder.com.au offer indemnity value and agreed value policies.
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Data taken from brand product disclosure statements on May 2017. Benefits, conditions and amounts are subject to change at anytime.
How much does indemnity income protection insurance cost?
As previously mentioned, indemnity income protection is usually the more affordable of the two options due to the requirement to prove your employment status and income.
However, there are a number of other factors that can have an impact on the cost of income protection premiums, including:
- Your age. Premiums will increase in price as you get older.
- Your gender. Rates for women are higher than for men. This is because women are considered to be more at risk due to factors like breast cancer or complications arising from pregnancy.
- Your occupation. This can have a significant influence on how much you will have to fork out for premiums. If your job regularly exposes you to hazardous or risky situations, you shouldn’t be surprised to find that you’ll be charged more for premiums. That said, there are specialist providers that work closely with applicants from certain applications to provide affordable cover.
- Your lifestyle and habits. Smokers and those who engage in adventure sports activities can expect to pay higher premiums.
- Your pre-existing medical conditions. If you suffer from any pre-existing conditions you will be seen to pose a higher risk to the insurer, so increased premiums will result.
- The waiting period. This is how long you choose to wait before receiving benefit payments, and the shorter your waiting period the higher your premiums.
- The benefit period. How long you will receive payments for in the event of a claim also affects the cost of your cover.
- How much you insure yourself for. Minimum and maximum level of cover can vary greatly between insurance providers.
- Any optional extras you add. Each policy has a range of extra-cost options you can select to increase the level of cover.
What are the drawbacks of indemnity income protection insurance?
While indemnity value income protection insurance is cheaper than agreed value cover and does have significant advantages, there are drawbacks to this type of insurance.
The most notable disadvantage of an indemnity policy is that if your income has reduced since you applied for cover, you’ll receive a smaller benefit amount. You could end up receiving a payment that is significantly less than you expected, which can have a hugely detrimental effect on your finances.
In short, indemnity value cover is generally best for those people whose income will increase over time or at least remain constant. For self-employed people or small business owners who have fluctuating incomes, agreed value cover will generally be a more suitable option.