Agreed Value vs Indemnity Income Protection: What's the Difference?

The main difference between agreed value and indemnity income protection comes down to when your insured income is worked out. With an agreed value approach, the amount is largely settled when you take the policy out. With an indemnity approach, it is based on your earnings around the time you claim. That distinction can matter a great deal if your income changes over time.

How does agreed value cover work?

With agreed value cover, you establish your income when you apply, usually with financial evidence, and the insurer agrees to insure a benefit based on that figure. The appeal is certainty: provided the policy terms are met, you generally know what the benefit will be, even if your income later dips. That certainty is why it has traditionally been popular with self-employed people whose earnings move around.

How does indemnity cover work?

With indemnity cover, the benefit is worked out from your income around the time you claim, rather than when you applied. If your earnings are steady or rising, this can work perfectly well. The catch is that if your income has fallen — say after a tough year in business — the benefit you actually receive could be lower than you expected, because it reflects your more recent earnings.

Why does the difference matter most for self-employed people?

Salaried employees often have fairly predictable pay, so the gap between the two approaches is smaller for them. For business owners, contractors, and the self-employed, income can swing from year to year, and it is exactly those people for whom an agreed value approach has historically offered the most reassurance. The trade-off is usually cost and the evidence required up front.

What has changed about agreed value cover in New Zealand?

The availability of agreed value income protection has shifted in recent years, with some insurers moving away from offering it in the way they once did. Because the market changes, it is worth checking what options a particular insurer offers now rather than assuming a structure is still available. An adviser can tell you what is currently on the table.

Which one is right for me?

There is no universal answer — it depends on how stable your income is, how much certainty you want, and what is available and affordable when you apply. The key is to understand which basis a policy uses before you rely on it, so there are no surprises at claim time. Our guide to income protection for high-income earners covers related ground.

If you would like help comparing income protection options for your situation, you are welcome to get in touch.

The information in this article is general information only and is not intended as financial, medical, health, tax or other advice. It does not take into account any individual’s personal situation or needs. You should consider obtaining professional advice from a financial adviser in relation to your own circumstances and before acting on this information.