Types of Income Protection Insurance Policy

Income Protection Insurance will provide you with an income if you are unable to work due to long term illness or injury. The premiums payable are based on the type of income protection insurance you choose, so it's important to understand the differences (and advantages) between them.

There are two main types of income protection insurance available in Australia - agreed value and indemnity value.

Indemnity value income protection insurance

Under the indemnity value type, the monthly amount payable to insured will be the lesser of:

  • 75% of insured's pre-disability income, or
  • the monthly amount insured shown in the policy.

An indemnity value policy will require financial checks at the time of claim and your benefit (if the claim is successful) will be based on pre-disability earnings - i.e. 75% of monies earned in 12 months before claim. This could potentially result in a reduced benefit being payable if you have recently earned less than at commencement of the policy.

"Pre-disability earnings? is defined differently by different insurers. It is usually measured as income earned over the last 12 months, or the best 12 months over a specific period (for example, the previous two years).

Indemnity value policy is the cheapest form of income protection. This is because the insured and not the insurer assumes the risk of any volatility in income. Therefore please note the type of the policy when comparing premiums.

Agreed value income protection insurance

An agreed value policy ensures that the full benefit amount is paid in the event of a successful claim whether it reflects your income at the time of claim or not.

You can provide proof of pre-application income either before or after your policy starts. However if you cannot provide proof of pre-application income before or at the time of claim, your monthly payable amount can be reduced.

Generally speaking, agreed value policy usually offers the monthly benefit guaranteed upfront (at application stage). For this reason, financial evidence is not required at claim time to verify the monthly benefit. This eliminates a key step in the process resulting in faster administration of claim during a stressful period of illness or injury.

Agreed value policy is more expensive option of income protection, because in this case the insurer accepts the risk of reduction in the insured's income after issuing the policy.

Which type of income protection policy is right for you?

Whether an agreed value or indemnity value policy is suitable to your circumstances may reflect your employment status (self employed or employee) or whether you plan to change careers in the future.

We compare all major life insurance companies in Australia. Please fill out the form on this page and our consultants will help you to choose which type of income protection insurance is right for you.

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Published on April 4-th, 2010 in Insurance
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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Any information or advice contained on this website is general in nature and has been prepared without taking into account your objectives, financial situation or needs.

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