Agreed Value vs Indemnity Income Protection for the Self-Employed (NZ)

If your income jumps around, how the benefit is calculated decides what you actually get paid. Agreed value vs indemnity income protection for self-employed New Zealanders, and what's available now.

When you work for yourself, your income rarely sits still. A strong quarter, a quiet one, a big invoice that lands late — the number moves. So when you take out income protection, the question that matters most is not the headline percentage. It is how the insurer works out your benefit, and when they do it. That single design choice decides what actually lands in your account at claim time.

This guide explains the difference between agreed value and indemnity income protection, why it matters more for self-employed and contractor earners than for salaried staff, and what is realistically available to buy in New Zealand now.

TL;DR: Both agreed value and indemnity income protection cap the benefit at up to 75% of your pre-disability income ¹. The difference is when your income is proven: agreed value fixes it when the policy starts; indemnity tests it at claim time, so a recent income dip cuts your payout. Many insurers have moved away from agreed value, leaving indemnity and loss-of-earnings cover ³.

What's the difference between agreed value and indemnity income protection?

Income protection pays a monthly benefit while you cannot work because of illness or injury. Across NZ insurers the benefit is generally capped at up to 75% of your gross pre-disability income, less any other income or payments you receive for the same illness or injury ¹. That cap is the same whether the cover is agreed value or indemnity. What differs is how the income behind it is proven ¹.

• Agreed value sets the benefit on an income figure you agree and evidence when the policy starts. You prove your income once, up front, and that figure is locked in ².
• Indemnity pays a proportion of your income at the time you claim. You prove your income when you make the claim, not when you buy the cover ².
• Loss of earnings is a middle option some insurers offer. The benefit can be calculated as either agreed value or indemnity — whichever produces the higher figure — which gives some flexibility when income fluctuates ².

In a flat year, the two main types pay much the same. The gap only opens when your income at claim time looks different from your income when you took out the cover.

Why does this matter most for the self-employed?

Salaried employees usually have steady, easily proven income: a payslip, a consistent figure year to year, PAYE records. For them, an indemnity re-test at claim time tends to land on roughly the same number they would have agreed anyway.

Self-employment is different. Earnings move with the market, the season, and the timing of invoices. Records can be lumpier — drawings, retained profit, expenses and add-backs all complicate "what do you actually earn." That is the exact situation where the proof method starts to matter, because indemnity ties your payout to a recent slice of income that might not represent a normal year.

This is not a niche group. In the March 2026 quarter, the seasonally adjusted number of employed people in New Zealand was 2,889,000 ⁸; a meaningful share of that workforce is self-employed or contracting and carries its own income-continuity risk, without an employer's sick leave behind it.

How does each one get proven at claim time?

This is the heart of it. The table below sets out how the two main bases differ in practice, with loss of earnings shown as the flexible middle ground. The scenarios are illustrative and based on general policy design — your own policy wording governs an actual claim ².

Agreed value vs indemnity: how the benefit is proven

Source: insurer PDS comparison, illustrative ².

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 follows your real recent numbers — which helps if income has risen, but bites if it has fallen. This is the same averaging risk the self-employed already face under ACC, where weekly compensation is based on pre-injury earnings averaged over a set period ⁷.

What happens if your income drops before you claim?

Say a self-employed person evidenced $90,000 of income when the policy started, then had a lean recent year and provable earnings fell to $60,000.

• On agreed value, the benefit is based on the figure agreed and proven up front. The recent dip is generally set aside ².
• On indemnity, the insurer assesses income at claim time. The benefit is calculated against the lower recent figure, so the payout shrinks with the earnings ².

Both still cap the benefit at up to 75% of income ¹, so neither replaces your full pay. But the base that percentage applies to is the whole point — and on indemnity that base moves with your most recent earnings. For someone whose income naturally rises and falls, that is the scenario worth understanding before signing, not after.

Our piece on weighing income protection against a savings buffer is a useful companion if you are thinking about how much certainty you actually need.

Is agreed value still available in NZ, and what replaced it?

This is where the market has shifted. Agreed value cover has been withdrawn or redesigned by several NZ insurers themselves — a commercial product decision, not a rule imposed by the Financial Markets Authority ³. Most new income protection cover is now sold on an indemnity or loss-of-earnings basis, where income is proven against earnings at claim time rather than locked in at application ³.

That does not mean agreed value has vanished everywhere, and availability and terms vary by insurer and occupation, so the practical step is to confirm what each insurer is actually writing today rather than assuming an older policy is still sold the same way. Not every provider in the market is shown here, and each insurer's product disclosure statement sets out its own definitions. The shift does mean that, for many self-employed applicants, the real choice now is between indemnity and loss of earnings — which makes understanding how income is proven at claim time more important, not less.

How do loss-of-earnings and other variants work now?

Loss of earnings is the response several insurers have offered as agreed value has narrowed. AIA, for example, structures income protection so the benefit can be calculated on either basis, paying the higher figure at claim time ². If your income has climbed, it behaves like indemnity and pays on the higher recent figure; if your income has fallen, it leans toward the figure set up front. For genuinely variable earners, that two-way flexibility is the appeal ².

The trade-offs are worth naming honestly:

• Cost. Flexibility and certainty generally cost more than plain indemnity for the same headline benefit. Whether that is worth paying depends on how much your income really moves.
• Documentation. You still need clean income records. Even loss-of-earnings cover involves proving recent earnings at claim, so keeping tidy accounts is part of making any of these work.
• Offsets. Income protection benefits offset against other payments for the same event, including ACC, so the combined total does not exceed your insured percentage of pre-disability income.

That ACC offset is central for the self-employed. ACC weekly compensation pays up to 80% of pre-incapacity gross weekly earnings, but only for injury, not illness ⁴ — which is why income protection is the main cover for illness-related income loss. ACC is also capped: the maximum gross weekly compensation is $2,418.55 per week (effective 1 July 2025) ⁵, and for the levy year from 1 April 2026 the maximum liable earnings threshold is $156,641 ⁶. Earnings above that are not covered for ACC purposes, leaving higher earners a gap that private cover is designed to fill. Our explainer on being off work through illness rather than injury covers that gap in full.

How should fluctuating-income earners choose?

There is no single right answer. It depends on how variable and provable your income is, and how much certainty you want to pay for. A few questions tend to be more useful than a blanket rule:

• How much does your income actually move year to year? The wider the swings, the more the proof method matters, and the more a loss-of-earnings or agreed-value basis is worth weighing where available ².
• How clean are your income records? Indemnity and loss of earnings both rely on proving recent earnings at claim — thin or messy records make that harder ².
• Could a quiet recent year coincide with a claim? That is the scenario where an indemnity re-test cuts hardest, and where a higher-of-the-two basis cushions the result ².
• Are you above the ACC liable-earnings cap? Higher earners carry a larger gap above ACC's limits ⁵⁶, which is part of sizing the cover.

The most expensive mistake is usually not picking the "wrong" basis — it is not knowing which basis you are on. Plenty of older policies are indemnity by default, and the owner only discovers it at claim time. Our piece on income protection for contractors and the illness gap goes further into the contractor-specific traps.

What to check in the policy wording before you sign

Before committing, it is worth reading (or having someone read with you) for these specifics:

• The benefit basis — agreed value, indemnity, or loss of earnings — stated plainly ².
• How income is defined and proven, and over what period earnings are assessed at claim ².
• The percentage and any income tiers, since the up-to-75% cap can step down at higher income bands ¹.
• Offsets against ACC, other insurance and any benefits for the same event ⁴.
• Wait period, benefit period, and exclusions or stand-downs — these decide when and how long the cover actually pays.
• Tax treatment. Income protection payouts are generally treated as taxable income by Inland Revenue, and premiums are correspondingly tax-deductible where the payout is taxable — relevant to sizing cover against your net replacement need ⁹.

Frequently asked questions

What's the main difference for a self-employed person? Agreed value sets your benefit on an income figure proven when the policy starts, so the amount is fixed up front. Indemnity pays a proportion of your income at claim time, so it is re-tested against recent earnings ². For fluctuating income, that re-test is the key risk — a quiet recent year can lower an indemnity payout, while an agreed value figure is generally unaffected.

Can I still buy agreed value income protection in NZ? Availability has narrowed. Several insurers have withdrawn or redesigned agreed value as a product change of their own, not an FMA rule, so most new cover is now indemnity or loss of earnings ³. It may still be available with some insurers for some occupations, so it is worth confirming current options rather than assuming.

What is loss-of-earnings cover? It is a basis where the benefit can be calculated as either agreed value or indemnity — whichever is higher at claim time. AIA offers this structure, and it is designed to give flexibility when income fluctuates ². Like the others, it offsets against ACC and other payments for the same event.

Does ACC cover me if I'm self-employed and get sick? ACC weekly compensation pays up to 80% of pre-incapacity gross weekly earnings, but generally only for injury, not illness ⁴. That is the main reason income protection exists. ACC is also capped — the maximum gross weekly compensation is $2,418.55 per week (effective 1 July 2025), and liable earnings are capped at $156,641 for the 2026/27 levy year ⁵⁶.

Is an income protection payout taxed? Income protection benefits are generally treated as taxable income by Inland Revenue, and the premiums are correspondingly deductible where the payout is taxable ⁹. That tax treatment matters when sizing cover against your net replacement need.

How do I find out which basis my current policy uses? It is stated in the policy schedule and wording, though it is not always obvious. If you are not sure, having an adviser read the document and explain what it would actually pay is the most reliable way to find out before you ever need to claim.

This article is general information only and is not personalised financial advice. It does not take into account your particular financial situation, goals or needs. Before acting, consider whether it's right for you and seek advice tailored to your circumstances. Whether a claim is paid depends on the terms, conditions, exclusions, stand-down periods and underwriting of the specific policy, and on your disclosure. This is a summary only — always read the policy wording / product disclosure statement. Smiths Financial is a trading name of Craig Smith Business Services Ltd (FSP712931), which holds a Class 2 financial advice provider licence issued by the Financial Markets Authority to provide financial advice on personal risk insurance, health insurance, general insurance, KiwiSaver and managed funds. Our advisers, Henry Smith (Financial Adviser) and Craig Smith (Principal Adviser), are bound by the Code of Professional Conduct for Financial Advice Services and the duty to give priority to clients' interests. Craig Smith Business Services Ltd is a member of the Financial Dispute Resolution Service (FDRS), a free and independent dispute resolution scheme. We're generally paid by commission from the insurer when you take out a policy through us; this doesn't change the premium you pay, and we manage any conflicts of interest in line with our duty to prioritise your interests — full details in our Disclosure. Written by Henry Smith, Financial Adviser; reviewed by Craig Smith, Principal Adviser. Last reviewed 6 May 2026.