The types of income protection insurance explained

Income protection can be confusing—but it doesn’t have to be. Take a look at the different types of income protection insurance: agreed value, indemnity and loss of earning insurance, and let us help you decide which is the right choice for you.

Read more: The breadwinner's guide to income protection

Agreed value

Under an agreed value income protection policy, you are covered for a specific benefit amount per month, which you agree with your insurer.

Typically, this is a percentage of your pre-tax income at the time you make the policy, so you must provide proof of income when submitting your insurance application.

Pros

• You know exactly how much you’ll be getting per month if you do need to claim.
• If your income drops, your benefit payment will still be based on the higher income.

Cons

• If your income increases, your benefit payment will still be based on the lower income.
• You need to provide proof of your income at the time of taking out a policy.

Good for:

Contractors, tradespeople and other self-employed people, or those with variable income.

The added security of a guaranteed income regardless of how well or poorly the year has gone so far is often well worth the additional financial information that you need to provide at application time.

Indemnity value

Under an indemnity value income protection policy, you are covered for a percentage value of your income at the time you make the claim.

You do not need to provide proof of income at the time you make the policy, and typically insurance companies allow you to use proof of income up to a set number of years before the claim is made.

Pros

• No significant benefits. Please contact us to find out more.

Cons

• You need to provide proof of your income at the time of making a claim.
• Often more expensive than agreed value.
• If your income decreases, your benefit payment will decrease.
• Other factors affect your benefit amount, depending on your policy wording.

Good for:

Salary and wage earners, or those with a consistent, fixed income.

If you have consistent income, you don’t need to worry as much about the variations in your yearly incomings—and that means you can choose to opt for indemnity value cover without as much risk. However, to give you absolute certainty that you are paying for something that you are going to get at claim time, BRAVEday always recommends an agreed-value policy.

Loss of Earnings

Loss of earnings protection is similar to indemnity protection, though with one small difference. The benefit you receive is based on your actual income shortfall, rather than your baseline income at the time of the claim.

For example, if you earned $75,000 a year and were injured to the point that you needed to take time off, your income shortfall would be $75,000. However, if you were still able to work part time, your income might drop to $25,000, meaning your benefit would be based on the shortfall of $50,000, rather than the full $75,000.

This also takes passive income into account, in that it will often only cover the income that is at risk of loss as a result of your disability or illness.

 Cons

• Often more expensive than indemnity or agreed value policies. 

For more information on income protection insurance, download our free ebook below.