Income protection insurance will provide you with an income if you will not be able to work because of injury or illness which are long term. The kind of income protection insurance you choose will be the determining factor of the premiums payable so it is essential that you understand the differences and advantages of each type. Below are the most common types of income protection insurance:
Indemnity value income protection insurance
Indemnity value income protection is the cheapest form of this type of insurance. The reason for this is because the individual insured and not the insurer assumes the risk of instability in income. The monthly pay-out insured under the indemnity value income protection will be lesser of 75% of insured pre-disability income or the amount insured every month as shown in the policy.
This type of policy will need financial checks during the time of the claim and your benefit will be based on pre-disability earnings if the claim is successful. For example, 75% of income earned in 12 months before the claim. This could possibly result in a lesser benefit pay-out if you just recently earned less than at the beginning of the policy.
Insurers have their own definition of pre-disability earnings. But normally it is measured as income earned over the last 12 months or the best 12 months over a specified period.
Agreed value income protection insurance
This type of income protection is the more expensive one due to the fact that the insurer in this case accepts the risk of reduction in the insured individual’s income after the policy’s issuance.
An agreed value income protection insurance guarantees that the whole benefit amount is paid in case the claim is successful whether it is reflected in your income during the time of the claim or not. You can provide your proof of pre-application income either before or after your policy begins. But if you were not able to produce any proof of pre-application income before or during the time of your claim, your monthly pay-out amount may be reduced.
Basically, the agreed value income protection policy normally offers the monthly benefit guaranteed upfront at application process. Because of this reason, you are not required to provide financial proof during the time of claim in order to verify the monthly benefit. This results in a quicker administration of claim for eliminating one of the key steps in the process when you are on a stressful time of being ill or injured.
Which is the ideal income protection policy for you?
Before making any decisions make sure to consider all the benefits for each type of policy. Do your research and compare the terms and conditions for each policy offered by the company or companies you are considering. Make sure that whatever you choose, whether an agreed value or indemnity value policy, it will best suit your situation and will reflect your employment status and take into consideration whether you are planning to change careers in the near future as well.