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Types Of Income Protection


Most people believe that there are only two types of income protection insurance plans available in Australia, and while this is partially true, income protection plans can be further categorized depending on the tenure and the terms of the contract.

Primarily these types of insurance plans can be categorized into indemnity contracts and agreed value contracts. The main difference between indemnity contracts and agreed value contracts is the amount of money received after filing a claim. In the case of indemnity contracts the policy holder is required to submit financially documents when he files a claim and depending on these documents the insurance company decides a payment amount.

In the case of a value agreement contract the policy holder is required to submit financially documents at the time of applying for insurance and a fixed amount is given to the policy holder later on when he files a claim. Indemnity contracts are cheaper since they have certain limitations where as value agreed contracts are preferred by majority of buyers since in this type of contract the buyer definitely receives a fixed amount even if his income has reduced significantly at the time he files the claim.

Income protection plans can be classified into two categories based on the tenure of the contract. Long term insurance plans protect policy holders for 15 years or more, where as short term insurance plans protect policy holders for 10 years or less. Based on the terms of the policy, income insurance can be categorized into 2 categories that are cancellable contracts and non cancellable contracts. Contracts that can be cancelled by the insurance company at the time of renewal are cheaper however non cancellable contracts are beneficial for buyers who have shifted into the high risk category, due to a change of occupation or health status.

Income protection insurance plans that are cheaper usually have fixed terms and buyers who opt for such plans are offered indemnity contracts that are cancellable. In most cases, buyers are given the option of choosing between stepped premiums and levelled premiums however cheaper contracts may not offer this option. Levelled premiums are ideal for people who opt for contracts with a long tenure since these contracts allow policy holders to pay a fixed premium til they turn 65 years old, after which they will most likely be asked to pay stepped premiums. People who opt for stepped premiums can enjoy the benefit of paying low interest rates at first, but in the case of stepped premiums, policy holders have to pay increasing premiums as they grow older.

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