Insurance: Agreed & Indemnity Value – What are the issues?
Background
There is some debate in the Insurance Industry over the different types of cover. This can be confusing for clients as they receive sometimes conflicting advice.
To simplify a complex subject we summarise some of the key issues.
Agreed Value: The Insurer agrees to pay a certain sum on disability.
Indemnity Value: The Insurer agrees to pay a certain sum on disability subject to proof of income at time of claim.
On the surface the Agreed Value appears to be better however it is not that simple.
Some Insurance Companies – Sovereign and ING especially – will only insure 55% of income, instead of the usual 75%, because they believer that this is non assessable for tax purposes.
The client is dependent on the IRD not taking a different view to the Insurer or never changing its view. The IRD has not made its view clear although it has indicated it hopes to publish a final ruling in July 2007. The consequences for a client could be ruinous by either being under insured or having penalties on unpaid tax.
Tax Deductible
Many Agreed and all Indemnity policies have premiums that are tax deductible with any benefits being assessable based on 75% of income. This provides certainty as well as lower net premiums. In addition many Indemnity policies provide better overall terms.
Summary
Mainstay are continually researching policies to best suit you. It is a complex issue but one thing is certain – the offer of a “tax free” policy will cost you more in the short term and may cost you a fortune in the long term.
