What is indemnity income protection?

If you’re looking to take out income protection insurance, one of the questions you may have is what ‘indemnity value’ means. Here’s a quick guide to indemnity value income protection, to help you decide whether it could be right for you.

Depending on the specific product and provider, taking out an income protection insurance policy may involve choosing between two different benefit structures: indemnity value and agreed value. Agreed value is relatively self-explanatory, in that it entails you and your insurer agreeing on a fixed benefit amount (the amount your insurer pays you in the event of a successful claim) at the time you take out your income protection policy. However, indemnity value may not be as easy a term to decode.

What does ‘indemnity value’ mean?

In the context of income protection insurance, indemnity value means that the benefit value of your policy will be determined by your income at the time of your claim, rather than being set at the time you take out your policy. This means you may not be required to provide as much proof of your income or other financial documentation when you initially take out your policy. However, you still may need to provide some details regarding your occupation and other personal information in order to be approved for an indemnity value income protection policy.

Is indemnity value income protection better than agreed value?

Indemnity value income protection insurance is not inherently better or worse than agreed value income protection. However, depending on your personal circumstances and the nature of your employment, you may decide that indemnity value is a better choice for you. Here are some of the main differences and factors to consider when deciding which benefit structure may be best for your needs:

  • Indemnity value generally involves paying lower premiums than you would on agreed value policies, according to NobleOak, but you could end up with a lower benefit amount to match, depending on your income at the time of a claim.
  • Agreed value income protection may provide you with additional peace of mind due to knowing the exact amount your policy entitles you to, but NobleOak states that it is less common and typically more expensive than an indemnity value policy.  

Additionally, you may want to consider the nature of your regular income – is it stable, or does it fluctuate? If your income fluctuates, such as if you’re a casual or self-employed worker, an indemnity value policy could end up being a less suitable choice if you need to make a claim in a period of low income. An agreed value policy could help to provide financial security by ensuring that, regardless of your income at the time of your claim, you’re entitled to a fixed amount, which may end up being higher than what you’re earning at the time.

On the other hand, if your income is stable (e.g. a salary), you may consider an indemnity value policy to be a more suitable option. It’s important to note that indemnity value policies will, typically, at the very most, pay 75% of your pre-claim income, so take this into account when considering whether an indemnity value policy is right for you.  

Do income protection providers offer a choice between indemnity value and agreed value?

As a general rule, most income protection providers in Australia only offer one benefit structure for their income protection products. Indeed,  none of the direct income protection providers Canstar currently rates offers a choice between agreed value and indemnity value policies to consumers. If you want an income protection policy with a specific benefit structure, be sure to either check the PDS of any product you’re considering or contact the provider to determine whether they offer your preferred benefit structure.

Can I have indemnity value income protection through my super fund?

Most super funds do not offer a choice between indemnity value and agreed value income protection, instead choosing to only offer indemnity value cover to their members. This is due to clauses in the Superannuation Act which state that the amount you can receive from your super fund at any given time cannot exceed the amount you are currently receiving as income. This regulation arguably mitigates the previously mentioned potential benefits of an agreed value income protection policy, as it means you can’t insure yourself for an amount greater than your income at the time of your claim.

That being said, be sure to check with your super fund regarding what benefit structures they offer within their income protection cover, as some may still choose to offer agreed value cover to their members.

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