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The pitfalls of indemnity Income Protection cover


When looking for the right Income Protection policy for you or your loved ones, it is important to review the type of contract: Agreed or Indemnity?



Agreed contract – An agreed Income Protection contract ensures that your monthly benefit is calculated based upon your income at the time of application.
Indemnity contract – An indemnity Income Protection contract requires you to provide financials at the time of claim in order to justify your monthly benefit to be received.


It scares us how often I come across people who have been quoted indemnity Income Protection policies by some online Life Insurance brokers. It disturbs us even more when I hear that they were never told about their options! Many of these people do not understand how this may impact them in the event of a claim and simply believe that they are receiving a cheaper quote.


YES it is true that indemnity Income Protection policies are cheaper than agreed policies. Though there is a perfectly simple explanation for this – you may be paying for a monthly benefit that you will never receive!


For example, if your income will either increase over time or at worst will remain constant, an indemnity policy may be best for your situation as you will save money on your insurance premiums and be able to justify your monthly benefit at claim time. If however you could go through a period in the future where your income is reduced or fluctuating, it may be worthwhile paying a little more for your Income Protection and applying for an ‘agreed’ contract.

An ‘agreed’ Income Protection contract ensures that (if you provide full financial evidence at the time of application) you will receive the full benefit in the event of a successful Income Protection claim. In other words, you will receive the benefit that you have been paying for!


CASE STUDY - The following case study has been provided by Macquarie Life based on a real claim and highlights a common issue faced during the claims process.

John is a 55 year old male contract builder who has a $4,000 indemnity Income Protection policy that has been in force for seven months. He is self-employed. While jogging, John felt a sharp pain in his knee. His doctor diagnosed a torn cartilage in his left knee and John underwent surgery. He submitted a claim under his Income Protection policy.

John’s policy is up-to-date, the claim was lodged and initial claim forms were sent to John and his doctor. As this is an indemnity policy, financials were also required — in this case, income tax returns and business tax returns for two years, as well as profit and loss statements for the year immediately prior to the injury.

The doctor’s claim form confirmed the torn cartilage in John’s left knee and medically this is a valid claim.
His financials were:

  • Gross income $314,341
  • Total expenses $297,663
  • Total net income $16,678


The following were also taken into account, adding to the total net income listed above:
  • Superannuation contributions: $2,400
  • Depreciation: $2,917
  • Motor vehicle (50%): $7,052
  • Total annual income: $29,047

John’s monthly salary was therefore calculated as $2,420.58 ($29,047 divided by 12).
Therefore, the monthly benefit is $1,815.44 (75% of his monthly salary). As this amount (based on his pre-disability income in the 12 months prior to disability) was lower than the insured amount, Macquarie Life sought further information from John as to whether his pre-disability income may have been higher over the three years prior to disability. Unfortunately, John’s pre-disability income was not higher over this period and the monthly benefit payable remained at $1,815.44.

So, while John was still paid out for this claim, he received less than he expected due to the indemnity nature of his policy. Also, he had been paying for more cover than he actually needed (e.g. a $4,000 monthly benefit), and hence paid larger premiums.

The alternative would have been an agreed or endorsed value Income Protection policy, meaning that the income benefit would have been based on John’s true income at the time of application rather than at claim time.

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After having had my income protection, with a company based abroad, for the last 15yrs I recently decided to sort it here in Australia.(Now based here so it makes sense.)
Needless to say the thought of trying to get a similar product for a good price was a concern....

Dr S.T (BDSc)
Newman, WA.

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