Did you add indexation to your life insurance?
When you think of the word indexation, what springs to mind?
There are countless benefits to adding indexation to your life insurance and you may have added this when you initially arranged your policy with us at Caspian.
In the world of life insurance, financial advisors typically recommend including indexation with certain types of policies to ensure your loved ones would get the most out of the payout if the worst were to happen to you.
We know what you’re thinking - life insurance already seems complicated, surely not another thing to have to get your head around. But we are here to simplify indexation for you and tell you the reasons why you and your loved ones could potentially benefit from it!
What is indexation?
Indexation sounds complex but it is actually really straightforward - let us explain.
Put simply, indexation ensures that your life insurance policy will remain in line with inflation throughout your term length. Each year your chosen provider will contact you and ask if you would like to continue to keep your life insurance policy index-linked, if you agree to this then your life insurance will continue to increase in line with inflation for another year. Keeping indexation on your life insurance will mean that your monthly premium will rise by a very small amount each year and as a result so will your cover amount.
For different life insurance providers, the rate of inflation they apply to your life insurance will be different - some providers will follow RPI (Retail Price Index) and some providers choose a fixed percentage to increase your policy by each year, typically between 2-5%.
This may sound confusing but don’t worry when you initially arrange your life insurance, your Caspian protection specialist will advise you of the differences in inflation between different providers, they will answer any questions you may have so you can decide which would work best for your circumstances.
What is inflation and what has indexation got to do with it?
So now you know what indexation is, you might be wondering - how does it work?
When initially arranging your life insurance cover, one of our Caspian protection specialists will make recommendations on what types of policies you may need based on your health, lifestyle and financial circumstances. Once you have discussed the life insurance policies that are best suited to you and your Caspian protection specialist has arranged them for you, they will then discuss indexation with you and make recommendations on which of your policies need it.
To put inflation simply - as the rate of currency falls over time, the prices of goods and services increase meaning the price of our cost of living will be affected. Inflation refers to this rise in our cost of living as the general price of goods and services increases.
You might be wondering what inflation has got to do with your life insurance policy, as inflation increases by a small percentage every year adding indexation onto your life insurance policy ensures that the amount you are covered for increases each year as well. Essentially, indexation exists to combat inflation!
So with indexation added to your policy, the worth of your life insurance remains consistent over your term length. This ensures that if the worst were to happen and your loved ones were to receive a payout from your life insurance, then this amount would accurately reflect the current cost of living.
Freddos and inflation
So, we all remember Freddo’s right? The little frog-shaped bars from Cadbury, always at a ridiculously low price? If you want a real-life, easy-to-understand example of inflation and how it can skyrocket the price of certain items - just look at the Freddo bar. Although your life insurance policy would rise with inflation, these little bars have not aligned with inflation in such a precise manner.
Nowadays you will struggle to find one of these chocolate frogs cheaper than 25 pence but back in the 1990’s the price of a Freddo was only 10 pence and at their most expensive they were 30 pence in 2017! Although the Freddo and inflation debate started as a popular internet meme and the facts surrounding it vary, the idea behind it does carry some weight in the world of inflation.
There was national outrage when the price of a Freddo was drastically hiked from 25 pence to 30 pence in March 2017. As a result of this, the idea of ‘The Freddo Index’ was coined on Facebook and sparked discussions surrounding the continual rise in living costs.* The concept behind ‘The Freddo Index’ is the comparison between national minimum wage and how many Freddos you can buy with this amount. The comparison reflects the reality that the national minimum wage in the UK has not risen with the inflation prices of goods and services, housing and more!
Opt-in or opt-out?
The great news is you are not bound to a strict contract if you change your mind about indexation, having an index-linked policy is something that you can opt out of at any time. Those who opt-in to adding indexation onto their life insurance will be contacted annually by their chosen provider asking if they want to continue with their choice or opt-out.
One of the main advantages of adding indexation onto your life insurance is how it will benefit your loved ones who will receive the payout from your life insurance. Adding indexation onto your policy from the outset would ensure that the amount of money your loved ones would receive if the worst were to happen to them has aligned with inflation over the years. So if the policy does payout years after you originally arranged it then it would reflect the current economic situation.
Did you initially decline adding indexation onto your policy and now you are regretting it? This is something we can help you with. Not only are annual reviews of your life insurance vital to ensure your current policy best reflects your current circumstances but it is also great for times like this where you may have changed your mind about something such as index-linking your policy! One of our Caspian review specialists can evaluate your current policy and advise what they think is best, they will also consider your current circumstances and who knows, you could end up with a brand new life insurance policy for half the price.
Why do I need indexation on my policy?
Your Caspian protection specialist will never tell you that you need indexation on your life insurance. However, they will recommend a great addition to your financial protection policy as it will ensure that if a future claim is made on the policy then the amount that will be paid to your loved ones is worth the same amount in the future as it did when you initially arranged the policy.
A financial protection advisor will most likely recommend that you add indexation onto certain policies, this is because it works well with many different types of life insurance. However, indexation will never be recommended for your policy if you would not benefit from it.
Decreasing life insurance
Different types of circumstances require different types of life insurance policies and the same applies to indexation!
Decreasing life insurance can not be index-linked, this is because this type of cover is typically advised to cover a repayment mortgage. If your life insurance policy is decreasing, this means that the amount you are covered for will decrease every year alongside your term, aligning with the decreasing term and balance remaining on your repayment mortgage. One of the benefits of having this type of cover in place is that it is often much cheaper when compared to other types of life insurance as the sum assured decreases gradually over the term length.
Can’t remember if you added indexation onto your life insurance?
Don’t worry!
If you are unsure if you have indexation on your policy or not, you can find all the information and specifics regarding your life insurance in the individually created client pack we send out to all of our clients. Or if you can’t find your client pack or just want to hear a friendly voice, you can call up our customer service team on 0161 241 6146, they are on hand to help and will easily be able to check and see if you already have indexation on your policy.
Alternatively, if you don’t have indexation on your life insurance and would like to add it, one of our Caspian review specialists will be able to review your current policy and advise what they think is best.
Additionally, if you couldn’t find the answer to your question in this post, your protection specialist and our customer care team are on hand to help should you ever need any clarification regarding the details of your life insurance policy!
*fullfact.org
