When you apply for income protection insurance, you will be given a choice between an Indemnity Value and an Agreed Value policy. Which one should you choose? Before you decide, you need to consider a number of different factors, including your budget, which will dictate the level of cover you can obtain. Below we explain the differences between the two policy options.
In an Indemnity Value Policy, the value of the monthly benefit that you will receive will depend on your gross income when you file a claim. This is good if you have a regular employment and receive constant increases in your salary, but not if your salary has decreased between you taking out the policy and the time of your claim.
Other factors may also affect the actual amount you will receive, including the amount of premiums you have already paid, and the insured amount. The benefit of choosing this policy is that it comes with lower premiums, thus making it easier for you to make the payments. You also don't have to provide financials at the time of taking out the policy, which makes setting up the cover much easier. Most of the Rate Detective clients choose indemnity cover for this reason.
Meanwhile, there's the Agreed Value Policy. As the name suggests, the value that you receive will be based on what you and the insurer have agreed upon when you first applied for the policy. Thus, fluctuations in your income won't affect your benefit. This comes at a price, though, and a literal one at that. Agreed Value Policies are about 20 percent more expensive than Indemnity premiums.
The key burden to taking out an Agreed Value Policy is you will need to prove you income at the time of taking out the policy. This usually involves providing at least your last 2 tax return statements. Often insurance companies will average your last 2 statements to arrive upon the agreed value.
The choice between Agreed and Indemnity comes down to your personal circumstance. Most of our clients who have regular income, that is likely to increase in the future, will take out an Indemnity policy. However, if your income fluctuates, or you might expect it to go down in the future, then an Agreed value policy will offer you the maximum cover. If budget is also a consideration, then Indemnity policies are significantly cheaper than Agreed.
This information has been prepared by Rate Detective and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision