Income Protection: Indemnity and agreed value
Written and accurate as at: Jul 10, 2017 Current Stats & Facts
A core provision of an Income Protection insurance policy is that it provides you with an ongoing monthly benefit payment in the event you are unable to work for a period of time due to sickness or injury.
The ongoing monthly benefit payment is usually up to 75% of your gross income, however some insurers may pay up to 85% (e.g. 75% paid to you directly and the remaining 10% paid to your superannuation account as a superannuation benefit). In addition, depending on how much you earn, the ongoing monthly benefit payment may be capped to an upper limit.
The ongoing monthly benefit amount is calculated from your pre-disability earnings.
How your pre-disability earnings are assessed will depend on the Income Protection insurance policy benefit type that was entered into with the insurer when cover was established.
There are two benefit types – indemnity and agreed value.
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Indemnity value
An indemnity value benefit type requires you to state what your gross income is when applying for an Income Protection insurance policy.
The quoted ongoing monthly benefit payment on your Income Protection insurance policy is then based on this gross income.
In the event of a claim you are required to provide supporting documentation of your gross income. Your insurer assesses your pre-disability earnings by using the documentation to determine whether you are eligible for the ongoing monthly benefit payment on your Income Protection insurance policy.
If the determined ongoing monthly benefit payment is lower than the quoted ongoing monthly benefit payment on your Income Protection insurance policy, you will receive the lesser amount; this can occur if your gross income has reduced, or fluctuated over time, from the date you established the Income Protection insurance policy and prior to claim.
Overall, an indemnity value benefit type may be appropriate if you do not expect your gross income to reduce or fluctuate over time. Furthermore, the insurance premiums for this benefit type are generally lower than a comparable Income Protection insurance policy with an agreed value benefit type.
Agreed value
The main difference with an agreed value benefit type is that the ongoing monthly benefit payment is assessed and agreed at the start of the policy, and not at the time of claim.
An agreed value benefit type requires you to provide supporting documentation of your gross income when applying for an Income Protection insurance policy.
Your insurer assesses your pre-disability earnings by using the documentation to determine your ongoing monthly benefit payment.
This ongoing monthly benefit payment is agreed upon at the start of your Income Protection insurance policy, which means that you will receive this amount regardless of whether your gross income reduces, or fluctuates over time, prior to a claim.
Overall, an agreed value benefit type may provide certainty in regard to the amount you will receive in the event of a claim; this may be appropriate if you expect your gross income to reduce or fluctuate over time. However, with this certainty, the insurance premiums payable are generally higher than a comparable Income Protection insurance policy with an indemnity value benefit type.
Ownership structure
As with any type of personal insurance, consideration should be given to who or what entity should hold (and, fund) the Income Protection insurance policy.
Generally, premiums for Income Protection insurance policies are tax deductible.
There is the ability to hold an Income Protection insurance policy within superannuation; however, there may be legislative restrictions associated with this. You should be aware of the legislative restrictions, as well as other potential restrictions that may apply when dealing with specific superannuation funds. This is where seeking financial advice is of utmost importance.
What this means for you
The decision to hold an Income Protection insurance policy with either an indemnity or agreed value benefit type will depend on your individual circumstances and your preference for cover.
Income Protection insurance policies vary between insurers’ so it’s vital to refer to your Product Disclosure Statement and individual Income Protection insurance policy for further information.
If you’d like to know more about the benefit type relevant to your Income Protection insurance policy then please contact us.
Also, take some time to test your knowledge of Income Protection as well as the other types of personal insurances with our Insurance Planning quiz.