I recently finalised a data audit for a client's Life Insurance Review. As part of my detailed audit process, I discovered the client was only covered for half of their insurable income, and they had to prove their income at the time of claim!

What Does Income Insurance Cover?

It's a good question. Unfortunately there is no simple answer (of course there isn't).

As with most insurance contracts, what your income insurance actually covers depends on the insurer and the terms of the contract.

A GDM Life Rule applies here: you get what you pay for. There are two main types of Income Insurance contracts - Agreed Value and Indemnity Value.

Agreed Value

Where possible, and affordable, I always recommend the Agreed Value Income Insurance policy, because you know what you're getting.

Basically, 'Agreed Value' means just that: the insurer 'agrees' to pay you the 'value' of the Amount Insured on the Policy Schedule, regardless of your income at the time of claim (which could be years in the future).

Sounds simple, but the key is that you prove your income at the time the policy is taken out - not at the time of claim.

Agreed Value contracts are likely more expensive compared to the alternative - Indemnity Value Income Insurance policies.

Indemnity Value

'Indemnity' is a fancy word used by insurers to confuse you - it basically means payment for loss. The word 'loss' is the key word when 'indemnity' is included in Income Insurance policies.

Indemnity Value Income Insurance policies will only pay you for your income loss at the time of claim - not when you take out the policy. And you have to prove it.

Of course, Indemnity Value contracts are usually less expensive compared to Agreed Value contracts, because the insurer might not have to pay you as much.

If your income is lower at the time of claim, than it was at the time you took out the policy, the insurer will only you pay you what you can prove you're earning at the time.

Consider this:

1. Your income was $100,000 at the time you took out the policy
2. You change jobs and your income reduces to $75,000
3. You're still paying the insurance premium for $100,000
4. You break your leg and make a claim
5. You're Income Insurance will only pay you for the loss of your $75,000 income

No Need to Worry

If you were concerned about my client not having the right Income Insurance cover, there is no need: as soon as I explained to the client their insurance only covered them for half of the what they need, and it was an Indemnity Value contract, the Income Insurance contract was reviewed, and the right cover will now be put in place. Phew! Crisis averted and we can all sleep well at night, knowing my client is protected.

If you're concerned about having the right Income Insurance, Contact Us for a free Financial Assessment (which includes your Life Insurances), at least we'll be able to let you know exactly what you're insured for.