Agreed Value vs Indemnity Income Protection in NZ (2026): The Edge Cases That Change Your Payout

Agreed value locks your benefit in when you buy. Indemnity re-tests your income at claim time. Here are the edge cases — pay rises, income drops, part-time — that change what each one actually pays.

Most people choose an income protection policy on price and never read which payout basis they are on. That basis — agreed value or indemnity — is the single thing that decides what lands in your account when you actually claim. For someone on a steady salary it rarely matters. For everyone else, it can be the difference between the cover you thought you had and a payout that gets re-calculated downward at the worst possible time.

This guide walks through how the two work, and then through the edge cases — a recent pay rise, an income drop, going part-time, not being able to prove income — where they part company.

TL;DR: Agreed value locks your insured benefit in when you buy the policy; indemnity re-tests your actual income at claim time ³. Both cap the benefit at up to 75% of your income ¹ and both pay a taxable monthly amount ². If your income recently fell, indemnity pays less; agreed value pays what you agreed.

What is the actual difference between agreed value and indemnity income protection?

Income protection pays a monthly benefit while you cannot work because of illness or injury. Most NZ insurers let you cover up to 75% of your pre-disability income ¹, and the benefit is treated as taxable income by Inland Revenue — which is also why the premiums are generally deductible where the payout is taxable ².

The difference between the two types is when your income gets assessed.

• Agreed value locks the insured benefit in at the time you take out the policy. You prove your income once, up front, and that figure is what the insurer agrees to pay if you claim — regardless of what your earnings look like later ³.
• Indemnity does not fix anything in advance. It assesses your benefit against your actual income at claim time, commonly your earnings over a consecutive 12-month period in the three years before you were disabled ³. You prove your income when you claim, not when you buy.

In a flat year where your income hasn't moved, the two pay the same. The gap only opens up when your income at claim time looks different from your income when you bought the policy — which is more common than people expect.

Why does indemnity cover re-test your income at claim time, not at purchase?

Indemnity is built around the idea of putting you back to roughly where you were, based on what you were genuinely earning just before you stopped work. That is why the insurer looks at recent income at claim time rather than relying on a figure you nominated years earlier ³.

The trade-off is certainty. Because indemnity is assessed against whatever your income happens to be when you claim, you carry the risk that your earnings have dipped in the meantime. If you had a quiet 12 months, or stepped back your hours, the payout follows your real numbers down. Agreed value shifts that risk to the insurer instead — which is part of why it tends to cost more.

It is worth being clear-eyed about the cost side: agreed value generally carries a higher premium for the same benefit, because the insurer is committing to a figure regardless of your income on the day you claim. Whether that extra cost is worth paying depends entirely on how stable and provable your income is.

Which edge cases make agreed value worth the higher premium?

The figure below sets out where the two pay differently. The scenarios are illustrative, based on standard policy wording rather than any one insurer's terms — your own policy's definitions are what govern an actual claim ³.

Agreed value vs indemnity: when each pays differently

Source: insurer PDS terms, illustrative ³.

The pattern is consistent: agreed value protects you when your provable income at claim time is lower or harder to evidence than it was when you bought the cover. Indemnity quietly catches up to you when your income is on the way up, but it can also catch you out when it is on the way down.

This is why self-employed and contractor applicants are often steered toward agreed value — it removes the need to prove income at claim time, which is exactly the moment when lumpy or hard-to-document earnings cause problems ⁶. We cover that contractor angle in more depth in income protection for contractors and the illness gap.

What happens if your income dropped in the 12 months before you claim?

This is the edge case that surprises people most. Say you insured $90,000 of income three years ago, then had a lean recent year and your provable earnings fell to $60,000.

• On agreed value, the insurer pays against the $90,000 you agreed and proved up front. The recent dip is ignored ³.
• On indemnity, the insurer re-tests your income at claim time. The benefit is recalculated against the lower recent figure, so your payout shrinks with your earnings ³.

Both policies still cap the benefit at up to 75% of income ¹, so neither replaces your full pay. But the base they apply that percentage to is the whole point — and on indemnity that base moves with your most recent earnings.

A useful way to frame it: indemnity gives the insurer the right to pay you less if your income has fallen, while agreed value gives that protection to you. If your income is volatile, recently grown, or could drop before you ever claim, that distinction is where the higher agreed-value premium earns its keep. If your salary is steady and easy to prove, the protection is largely theoretical and indemnity may suit. Our piece on income protection vs a savings buffer is a good companion if you are weighing how much certainty you actually need.

Can you still buy agreed value income protection in NZ in 2026?

Yes. Agreed value cover had not been withdrawn market-wide as at early-to-mid 2025 and remains available new — for example, Fidelity Life offers a choice of Indemnity or Agreed Value cover, and AIA and Chubb Life also offer agreed-value bases within their income protection range ⁶.

That said, it is becoming less common, and it is no longer offered as freely as it once was across every insurer and occupation. Some insurers reserve agreed value for particular occupations or income types, and the underwriting (proving your income up front) is more involved. Because availability and terms vary by insurer and change over time, it is worth confirming the current options rather than assuming the policy you bought years ago is still being written the same way today. Not every provider in the market is shown here, and each insurer's product disclosure statement sets out its own definitions.

How do recent pay rises or going part-time affect each type?

These two moves cut in opposite directions, which is why they are worth separating.

A recent pay rise. Indemnity can actually work in your favour here — because it assesses your actual recent income, a higher salary can lift the benefit, up to the policy's maximum ³. Agreed value, by contrast, pays the figure you locked in when you bought the cover; if your income has grown a lot since, your agreed benefit may now sit below 75% of what you earn, and you would need to have increased your cover to capture the rise.

Going part-time. This is where agreed value protects you and indemnity does not. Drop to part-time hours and your recent income falls, so indemnity re-tests the benefit down to your reduced earnings ³. Agreed value keeps paying the figure you agreed when you were full-time. People returning to work after children, easing toward retirement, or scaling back a business are the ones most exposed here.

There is a third structure that tries to give you the best of both. Loss of Earnings cover, offered by some insurers such as AIA, pays whichever basis — agreed value or indemnity — produces the higher benefit at claim time ⁸. If your income climbs, it behaves like indemnity and pays on the higher figure; if your income falls, it behaves like agreed value and pays the agreed amount. Like the other types, it offsets against ACC and WINZ payments ⁸.

It is also worth knowing that higher earners can hit stepped caps on indemnity cover. Some insurers tier the percentage you can insure by income band — Chubb Life, for instance, allows up to 62.5% of income up to $70,000, 60% on income from $70,001 to $100,000, and 55% above $100,001 ⁷. So the headline "75%" is not universal at every income level, and the fine print matters when you compare.

Is loss of earnings cover a third option, and who is it for?

Yes — Loss of Earnings sits alongside agreed value and indemnity as a third basis, and it is designed for people who cannot easily predict which way their income will move. By paying the higher of the agreed value or the indemnity calculation at claim time, it removes the guesswork about which basis would have served you better ⁸.

It tends to appeal to people whose income is genuinely variable — self-employed people, those with bonus- or commission-heavy pay, or anyone whose hours and earnings could realistically rise or fall before they ever claim. The trade-off, as with agreed value, is generally cost: more flexibility usually means a higher premium for the same headline benefit. Whether it is worth it depends on how much your income actually moves, which is exactly the kind of thing worth talking through rather than guessing at.

Whichever basis you choose, the benefit offsets against ACC and WINZ so the combined total does not exceed your insured percentage of pre-disability income ⁴⁸. ACC weekly compensation pays up to 80% of pre-incapacity earnings but is capped — for the year 1 July 2024 to 30 June 2025 the maximum gross weekly compensation before tax was $2,501.78 (roughly $136,000 of insurable earnings) ⁵. ACC also only covers injury, not illness, which is the reason most people hold income protection at all; our explainer on being off work through illness rather than injury covers that gap in full.

How should you choose between agreed value and indemnity?

There is no single right answer — it depends on how stable and provable your income is, and how much certainty you want to pay for. A few questions are usually more useful than a blanket rule:

• Is your income steady and easy to prove? If you are on a flat salary with clean payslips, indemnity often does the job at a lower premium, because the re-test at claim time will likely land on the same figure anyway ³.
• Is your income variable, seasonal, recently grown, or hard to document? This is the classic case for agreed value — you prove your income once, while your records are good, and lock the benefit in ³⁶.
• Could your hours drop before you claim? Part-time plans, a phased wind-down, or a sabbatical all favour agreed value, because indemnity would re-test against the lower recent income ³.
• Do you want to capture income growth too? Loss of Earnings pays the higher of the two bases and may suit people whose income could swing either way ⁸.

The most expensive mistake is not choosing the "wrong" basis — it is not knowing which basis you are on. Plenty of policies sold years ago are indemnity by default, and the owner only discovers it at claim time.

Frequently asked questions

What is the main difference between agreed value and indemnity income protection? Agreed value locks your insured benefit in when you take out the policy, so you prove your income once up front. Indemnity assesses your benefit against your actual income at claim time — commonly your earnings over a 12-month period in the three years before disablement ³. A recent income drop reduces an indemnity payout but not an agreed value one.

Can you still buy agreed value income protection in NZ in 2026? Yes. As at early-to-mid 2025 it had not been withdrawn market-wide and was still offered new — for example by Fidelity Life, with AIA and Chubb Life also offering agreed-value bases ⁶. It is becoming less common and availability varies by insurer and occupation, so it is worth confirming current options rather than assuming.

Is agreed value worth the higher premium? It depends on your income. If your earnings are variable, recently grown, hard to prove, or could fall before you claim, the certainty of a locked-in benefit is where the extra cost earns its keep ³⁶. If your salary is steady and easy to evidence, indemnity may give you the same payout for less.

What happens to my payout if my income dropped before I claim? On agreed value, the insurer pays the figure you agreed up front and ignores the recent drop. On indemnity, the benefit is re-tested against your lower recent income, so the payout shrinks with your earnings ³. Both still cap the benefit at up to 75% of income ¹.

What is Loss of Earnings cover? Loss of Earnings is a third option offered by some insurers, such as AIA. It pays whichever basis — agreed value or indemnity — produces the higher benefit at claim time, and like the others it offsets against ACC and WINZ payments ⁸. It tends to suit people with genuinely variable income.

Is an income protection payout taxed? Yes. Inland Revenue treats income protection benefit payments as taxable income at your marginal rate, mirroring the salary they replace, which is why the premiums are generally tax-deductible where the benefit is taxable ².

General information, not personalised financial advice. Seek advice tailored to your situation before acting. Whether a claim is paid depends on the terms, conditions, exclusions, stand-down periods and underwriting of the specific policy, and on your disclosure — always read the policy wording. Craig Smith Business Services Ltd (FSP712931), trading as Smiths Financial, holds a Class 2 licence issued by the Financial Markets Authority and is a member of the Financial Dispute Resolution Service (FDRS). Written by Henry Smith, Financial Adviser; reviewed by Craig Smith, Principal Adviser. Last reviewed 19 March 2025.