What Is Income Indemnity?

The principle of indemnity, typically used in the context of insurance contracts, states that the insurance company will only pay out the exact amount or the actual cash value of the loss or damage to an insured asset. This prevents people from deliberately benefiting or profiting from the loss or damage to their assets. Income indemnity protects income and is referred to in policy types such as a disability policy, where the insured is provided income for a certain time period in the event of an accident or illness.

Decreasing Production Risks With Income Indemnity

Income indemnity is important for managing risk within the arena of crop production. The USDA provides subsidized insurance to agricultural producers who face the risks of catastrophic events and lower production yield on a regular basis. These policies specify the price at which the producer is reimbursed in the event of a catastrophe or loss. This protects the gross income levels of farm owners against pricing volatility.

Income Indemnity and Disability Insurance

A disability income insurance policy provides the benefit of replacement of up to 80 percent of income lost due to illness or injury. The insurance company pays out these benefits if the potential recipient cannot perform the same job that he was performing prior to the illness or injury. The waiting period for receiving the benefits, the benefit period and the determination of whether the recipient can work part-time differ depending on the policy. Companies offer both short and long-term disability insurance policies.

Taxes on Income Indemnity Payments

If someone with pretax insurance premiums receives income indemnity payments, he has to pay taxes on the payments. Income indemnity payments from post-tax insurance premiums are not taxed. The Financial Services Review recommends pretaxing insurance premiums for the specific case of disability insurance for low-income single and married individuals as well as for higher-income younger married couples. The FSR recommends that higher income single individuals pay for disability insurance premiums after taxes.

Unemployment and Income Indemnity Payments

Income indemnity payments in the form of disability payments are included in gross income under unemployment payments. In the United States, individuals receiving disability payments should receive form 1099-G showing yearly unemployment compensation. Individuals can choose to have federal income tax withheld prior to receiving the payments. If federal income tax is not withheld, individuals may have to make quarterly tax payments.

References

• University of Nebraska-Lincoln: Principle of Indemnity
• UW-Laramie Wyoming: Managing Production Risks
• University of Georgia; Insurance Jeopardy; Joan Koonce
• Financial Services Review; Disability Income Insurance Premiums; Crain, et al., 2008
• Internal Revenue Service: Topic 418 -- Unemployment Compensation