Income Protection Insurance

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Indemnity Value Income Protection Policy

An indemnity value income protection policy will generally attract cheaper premiums than an agreed value policy. The reason for this is your monthly benefit may decrease if you experience a diminished income between the policy commencement date and claim date.

With an indemnity value income protection policy, you are not required to provide proof of income until claim time. This means that if your income decreases between the time your policy goes in force and the time you go on claim, your monthly benefit may also decrease.

Therefore an indemnity value policy is best suited to those who receive a regular and consistent salary and are certain that their income will not fluctuate between the time they apply for their policy and the time that they go on claim.

How much does an Indemnity Value Policy cover you for?

Under an indemnity value policy, your monthly benefit payable will be the lesser of:

  • The insured monthly benefit amount as set out in the policy schedule, and

  • 75 per cent of your pre–disability income

How is your Indemnity Value pre-disability income calculated?

Your pre-disability income is generally considered to be the average monthly salary you earned over the 12 months up until the time you went on claim.

With an indemnity value policy, your pre-claim income is not set in stone. Therefore the level of cover you establish at application time can potentially decrease if your income decreases between application and the time you go on claim.

For example:

Steve is insured under an indemnity value policy. At the time of application his monthly salary was $3,000. With income protection insurance, he would be covered for up to 75% of this monthly salary, that is, up to $2,250.

After an accident that left him unable to work, Steve claimed on his policy. When providing evidence of his pre-disability income, it’s found that in the 12 months prior to claiming on his policy, Steve earned an average monthly salary of only $2,800.

Therefore, Steve will only be entitled to 75% of $2,800, that is, $2,100 and not 75% of the original $3,000 per month salary that he stated at application.

Applying for an Indemnity Value Policy

Generally, with an indemnity value policy, you will be required to provide proof of your income at claim time, meaning that you do not have to provide any financial documents proving your income when you apply for your income protection insurance policy.

Claiming an Indemnity Value Policy

As you are not required to provide any proof of income at application time, at claim time you will be required to provide all financial documents proving your pre-claim income. Proof of your pre-disability income may include providing:

  • For Employees – Pay slips, group certificates, or tax returns and tax assessment notices.

  • For Self Employed as well as those listed in the point above, you may also need to provide profit and loss accounts, balance sheets, and the tax returns and tax assessments for your business.

Generally any costs that are incurred completing claim forms are to be paid for by the insured.

Indemnity Value Policy – Pros and Cons

  • Pro – the monthly premiums for an indemnity value policy are generally cheaper than those of an agreed value policy.

  • Pro – In recent years there has been a change in the definition of pre-disability income, with some insurers considering a pre-disability income to be your best 12 months of earnings in the last 2-3 years.

  • Con – As you are not required to provide proof of income at application time, if your income decreases between application and claim time, your monthly benefit will also decrease.

If you are looking to secure your income and would like to compare quotes for indemnity value income protection policies, please call one of our friendly advisers on 1300 135 205.