September 12, 2012


Why ‘index link’ your life insurance policy?

  • In 1982 (35 years ago) a litre of fuel cost about 35 pence* (by 2017 it had risen to £1.20)
  • The average price of a house in the same year was £24,177 (by Jan 2017 it had risen to £235,000).**

If you had chosen to arrange a £100,000 life policy when you were 30 years old, imagine what it’s 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.

When people arrange life insurance cover, an important consideration which is often overlooked, is the effect that inflation will have on the benefit as the years go by.

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 per cent per annum.

If your policy was arranged to provide your 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). That is to say that what you can buy for £100,000 today will not be the same in ten years’ time. You only have to look at your weekly shopping bill or the cost of fuel to see how prices have increased over the years. Index linking your Life Assurance policy will allow it to maintain its value.

We normally recommend an index linked policy. 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 check whether your policy is indexed or not.

If you find out that your current policy is not index linked and you would like to discuss the pro’s and con’s of changing to a policy that has this option, please give us a call.

We give no obligation advice and we’d be happy to provide you with a quote to help you decide whether it’s worth changing to an index linked life insurance policy.

When is a level term life insurance policy suitable (with no index linked option)?

The term ‘level’ means that the benefit will be a set or fixed amount which you will select when you take out the policy, eg £100,000 and the premiums can be arranged on a guaranteed basis, that is to say they 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). Therefore if the mortgage balance is £100,000 and the term of the loan is 20 years, a £100,000 level term policy based over a term of 20 years would probably be suitable.

Am I locked into the annual increases?

In short – No. Most providers allow an ‘opt out’. You will receive a letter from you 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.

Call 0800 644 4468 to speak with one of our award winning advisers.

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

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Are you unsure what cover is right for you?  Take a look at our handy guides ‘What Cover is Right for me?’

If this article was of interest you might also be interested in more ways that Future Proof can make your life insurance work harder for you.

Relevant life – Take out a relevant life policy which covers your own life and will pay a sum to your family/dependants if you pass away or are diagnosed with a terminal illness. Where the policy is paid for by your business, it can be tax efficient and result in savings of up to 50% on the premiums (depending on your tax band). The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Write Your policy in trust – to guarantee your policy benefit is exempt from inheritance tax and avoid probate. We help all our customers to place their cover in trust at no additional cost.

Policy benefits that give you more – from Global Treatment to Best Doctors when you need it most.

Level term cover for your repayment mortgage instead of decreasing term. As your mortgage liability reduces the level of cover available for your family increases. This should act as a top of life cover for your family – not a replacement of level term family cover

Whole of Life – guaranteed to pay out for life cover – no end date.

Do you suffer with a medical condition and concerned you can’t secure Life or Critical Insurance?  Please view our ‘Medical Guides’ for further information.

Whilst we will make every endeavour to help someone to arrange insurance, there is no guarantee of success. Please note that all life, critical illness and income protection quotes will be subject to full medical underwriting.


** The Office for National Statistics