20 December 2024
Margo Lestz
Head of Communications
The idea behind indexation is simple. It's just an add-on that allows you to increase your life insurance or serious illness cover in line with inflation. It’s an important addition to your plan, especially when inflation is on the rise.
Indexation Helps You Beat Inflation
Inflation impacts us all – from rising grocery prices to higher fuel costs. The same applies to the value of your insurance cover. Over time, inflation can significantly erode the real value of your policy, leaving less when you or your loved ones need it most.
Indexation allows you to increase your cover annually in line with inflation and ensure your policy retains its value in real terms.
With Indexation added to your plan, your monthly payments may go up a little each year - but every time they go up, so does your policy value. So, you can ensure your cover is worth as much tomorrow as it is today.
Example WITHOUT Indexation
Let’s look at an example of a policy without indexation added to see how the real value of the payout is affected.
Today: If you took out a policy with £100,000 worth of cover today, the real value of your policy payout would be £100,000.
In 20 Years: If your plan did not include indexation, 20 years later, the policy cover would still be £100,000, but assuming an average inflation rate of 3%, the real value would be only £55,370. Even though the amount of payout is the same (£100,000), the real value in 20 years would be half of the amount you originally started with.1
However, with an indexed plan, your cover would keep up with inflation and retain its real value.
Reasons to Add Indexation
Keep up with inflation: As we’ve just seen, inflation can erode the real value of your policy cover. Without indexation, the purchasing power of your policy’s payout decreases over time, but by adding it, you can keep your policy in line with inflation, and when a claim is made, your loved ones receive a pay out of the same value in real terms as you thought of all those years ago.
No additional medical underwriting: We all know that insurance typically becomes harder to get and more expensive as we age. However, as your cover grows through indexation, you won’t need to go through additional medical checks.
Flexibility: You are in control; Each year, you will have the option to increase your cover. However, you have full control to accept or decline the increase in cover and premium. If your needs change, you can opt out. However, if you decline consecutive increases, indexation will be removed, and your policy will revert to level cover.
Example WITH Indexation
Let’s look at an example of a policy with indexation to see how premiums are affected. This example is based on VitalityLife's current Indexation methodology and the Retail Prices Index from 1989 to 2021.
In 1989 Marco took out a life insurance policy of £40,000 to take care of his family should anything happened to him. Because he added indexation to his policy, his cover amount and his premiums increased each year to keep up with inflation.2
1989: When Marco took out the policy, he was paying £5 per month for his £40,000 worth of life insurance cover.
2021: If we jump ahead 32 years, we can see that Marco’s payments have risen alongside his cover, and he is now paying £27 a month for £110,000 of cover.
Over 32 years, his cover amount increased by £70,000, while his payments increased by £22 a month.
Sound Interesting?
If keeping up with inflation by adding indexation to your policy sounds like a good idea, let us help you get started. Your Genistar representative can help you understand indexation and answer any other questions you might have about your complete financial plan.
Contact your Genistar representative for more information, or get in touch with our Genistar Support Centre
__________
The information provided on this website is for educational or informational purposes only. Please refer to our legal disclaimer for further information.
Share article
