At a Glance
- Indemnity Policies: Calculate benefits based on income at claim time; generally cheaper but require income proof when claiming.
- Agreed Value Policies: Calculate benefits at application time; fixed benefit amount, ideal for fluctuating incomes but more expensive.
- Policy Changes: Agreed value policies are no longer sold after 31 March 2020; only indemnity policies are available.
When choosing an Income protection insurance policy, it’s crucial to understand the differences between indemnity and agreed-value income protection. These options not only influence the premiums you pay but also affect how your monthly benefit is calculated.
The Basics: Indemnity vs Agreed Value
Indemnity Income Protection
An indemnity policy calculates your benefit based on your gross income at the time of the claim. This means that if your income fluctuates, the amount you receive might vary. Indemnity policies are typically more affordable and are well-suited for individuals with stable incomes, such as salaried employees. When you make a claim, you’ll need to provide proof of your income over the previous 12 months.
Agreed Value Income Protection
Agreed value policies, on the other hand, calculate your benefit at the time of application. You will need to provide proof of your income upfront, and the insurer will agree on a benefit amount that remains fixed throughout the policy’s term, regardless of any changes in your income. This type of policy is generally more expensive and is ideal for those with fluctuating incomes, such as self-employed individuals or freelancers.
Key Changes: End of Agreed Value Policies
Since 31 March 2020, agreed value income protection policies have been no longer available for purchase. This change is part of broader income protection rule adjustments, with more changes expected to follow. As a result, only indemnity income protection insurance can be bought, impacting how future policies will be structured.
Choosing the Right Policy
Assess Your Needs
When selecting an income protection policy, consider your specific requirements, employment type (full-time, part-time, or self-employed), and the premium you can afford. Additionally, think about the likelihood of maintaining your income over time.
Application Process
- Indemnity Value: No proof of income is needed when you apply, but verification is required when you make a claim.
- Agreed Value: Proof of income is required at the application to verify the benefit amount.
Benefit Payable
- Indemnity Value: The payout is based on your income at the time of the claim, usually calculated over the 12 months prior.
- Agreed Value: The benefit amount is agreed upon at the application stage and remains fixed.
Is it for you?
- Indemnity Value: Best suited for employees with stable, regular salaries who can easily provide proof of income.
- Agreed Value: Ideal for those with fluctuating incomes, such as self-employed individuals, small business owners, and freelancers.
Premium Price
- Indemnity Value: Generally cheaper than agreed policies.
- Agreed Value: Usually more expensive due to the fixed benefit guarantee.
Final Considerations
When deciding between agreed-value and indemnity-value income protection, assess the stability of your income, your future career plans, and how much you can afford to spend on premiums. Each policy type has advantages and disadvantages, and the right choice will depend on your unique circumstances.
Indemnity Value is suitable for those with a stable income, offering cheaper premiums and a straightforward application process.
Agreed Value is preferable by self-employed individuals or those with fluctuating incomes. It provides certainty and faster claims processing, albeit at a higher premium.
Regularly reviewing your coverage ensures it remains relevant and sufficient to support you and your family if you’re unable to work.
