What is an index-linked life insurance policy?

An index-linked insurance policy is an insurance policy that has the option to keep up with the cost of living, as it increases according to the UK’s Retail Prices Index (RPI) or a set annual percentage.

We have all heard in the news about the rise in the rate of inflation and how this has impacted the cost of living crisis. Life, critical illness, and income protection insurance policies can all be future-proofed against inflation when they are index-linked.

If you choose to index link your insurance policy, it means that as the cost of living goes up, so does the value of your policy. This is important because it means that your policy will be able to keep pace with inflation, and will still be worth something in the future.

Without index linking, the value of your policy would decrease over time, as the purchasing power of your money decreases. This type of policy is therefore an important tool for preserving your insurance sum insured over the long term.

If you had chosen to arrange a £100,000 life policy when you were 30 years old, imagine what its real value would be if a claim was made 35 years later. It’s fair to say that the £100,000 won’t go as far as you were hoping if you take into account the rise in the cost of living.

How does index linking a policy work?

Arranging cover with an ‘index-linked option’ allows the policy benefit to increase on an annual basis. This helps to offset the effects of inflation. Most policies can be arranged to increase in line with the retail price index, or in the case of some insurers, by a specific percentage eg 5 percent per annum.

As your sum insured increases, your premium will also rise to reflect the increased benefit. If your policy premium is not increasing each year, it is worth checking your paperwork to see whether your policy is indexed or not.

If your policy was arranged to provide your partner or family, it is important to arrange your policy with an indexation option. As time goes by the real-time value of the pay-out will decrease because of the effect of rising prices (inflation). We normally recommend an index-linked policy.

Index linking your Life Assurance policy will allow it to maintain its value

You only have to look at your weekly shopping bill or the cost of fuel to see how prices have increased over the years.

If you find out that your current policy is not index-linked or would like us to look into this on your behalf, please give us a call. We are also happy to discuss the pros and cons of changing to a policy that has this option.

We have current knowledge of the changing landscape of underwriting of all providers in the UK. Researching, so that you don’t have to. What’s more our advice comes at no obligation. Meaning you don’t pay us directly. We get paid by the insurer if you decide to start a policy with them. There are no hidden costs.

Am I locked into the annual increases?

You will not typically be locked into annual policy increases. Most providers allow an ‘opt-out’. You will receive a letter from your insurance company every year informing you of your new premiums and benefits for the following year. At this stage, you can opt out of the indexation, and your premiums and benefits will be frozen at their current levels.

Other policies which are available and could well benefit from being index-linked are:

There are policies that may not need index-linking

A level term life insurance can be policy suitable with no index-linked option. The term ‘level’ means that the benefit will be a set or fixed amount that you will select when you take out the policy, eg £100,000. The premiums will not increase throughout the term of the policy.

Level term cover (without an Index Linked option) is usually suitable for someone who is taking the cover out to protect a loan or a mortgage (particularly if it was arranged on an interest-only basis). As the mortgage balance will remain unchanged being interest only, indexation may not be required.