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If you’re worried about how inflation may reduce the effectiveness of your life insurance policy, then you’ve come to the right place. On this page, we’ll talk you through how to combat the effects of inflation and keep the value of your policy over the years to come.
Life insurance is a policy designed to pay out a lump sum to your family if you were to die. There are two types of life insurance for you to consider:
Term life insurance is life insurance that has a start and an end date, for example, you could set up your policy to insure you for 20 years. Because of this, term life insurance is one of the most cost effective options for life insurance.
Learn more about term life insurance.
Whole life insurance is a life insurance plan with no end date. You are covered from the moment the plan starts, to the moment you pass away. This policy has a guaranteed payout, and because of this it tends to be more expensive than term insurance.
Learn more about whole life insurance.
Please note: The insurance products offered by Cavendish Online have no cash-in value at any time. If you stop paying your premiums your cover will stop, your policy will end, and you will receive no benefit. If you have a term policy and have not claimed before the end of your chosen policy term, the policy will end, and no benefit will be paid.
Inflation is the increase in cost for goods and services over time. For example, if a pint of milk cost £1 last year, and now costs £1.04, then inflation is at 4%, because the price has gone up by 4%.
Increasing life insurance is a life insurance policy that increases over time. Usually these policies are linked to inflation, and the sum assured (the amount you’re covered for) increases to reflect inflation.
It’s important to know that depending on your plan and its terms & conditions, your premium may also increase to reflect your new sum assured. Be sure to check in with your adviser or insurer to understand if your premium will be affected.
Ensuring that your policy increases with inflation can be as simple as checking a box at the time of application and it is commonly referred to as indexation in the life insurance market.
Most increasing term policies will be set to increase with inflation, not necessarily beating it. The aim is to ensure that the sum assured has the same financial value as when it was taken out.
For example, £200,000 may not be worth as much in 40 years as it is now. Adding indexation to the policy helps ensure the money increases with inflation and has the same amount of buying power in the future.
Indexation is added to your policy at the application stage and it is usually not possible to add on to an existing policy.
Via Cavendish Online, you can get a quote online and add on indexation on the quotes results page.
If the option isn’t available to you, fear not, we have a team of expert advisers on hand who can look into a quote for you as well. Simply give us a call on
01392 436 193
Applying indexation generally does not change the starting premium of your policy. However, depending on the insurer this may not always be the case and you may see a slight increase in the premium reflecting the add-on, especially if you are applying for an Income Protection policy.
It’s important to check your own terms and conditions to be sure, but generally your premiums will increase to reflect inflation and your new, higher, level of cover.
It is, however, usually possible to skip a year or two if you don’t want it to increase. Your insurer will send you documentation when it is time to make the decision and it’s important you keep in touch with them.
As increasing life insurance policies are usually set up to rise in line with inflation, this usually happens once a year, and your insurer will write to you with instructions on how to apply the increase.
If you would like to increase the amount you are insured for for any other reason, then please get in touch with your insurer. Some insurers are happy to increase your cover without the need for a new application and no further medical information.
In some cases though, it’s not possible to get the increase, or the offer may be too low for your requirements, in which case, a new plan to top-up the difference may be needed.
The lump sum paid out by a life insurance plan is tax free. By default, any life insurance plan that pays out gets added to the deceased’s estate. If your estate is over the inheritance tax threshold, or your pay out takes you over the threshold, then the money could be subject to inheritance tax and get tied up in probate.
To make sure this doesn’t happen, you could consider writing your policy in trust. Writing your policy in trust ensures that the money goes straight to your beneficiaries without going through your estate first.
Writing your policy in trust can be done at any time, and is as simple as filling out your insurer’s form.
Indexation is available on a number of life insurance and personal protection products. For example, here is a short list of the products Cavendish Online can offer with indexation:
A term life insurance policy where the sum assured stays the same over the lifetime of the policy. This is available as a single policy or joint policy.
Learn more about level term life insurance.
Family income benefit is a life insurance plan that pays out monthly instalments instead of one lump sum when the person insured dies.
Learn more about family income benefit.
Whole life insurance is a life insurance policy that has no end date, it simply provides cover for the rest of your life. This is available as a single policy or joint policy.
Learn more about whole life insurance.
Critical illness cover is a policy that pays out if you were diagnosed with a critical illness, like cancer, a heart attack or a stroke. This policy sometimes also includes death for no additional cost. This is available as a single or joint policy.
Learn more about critical illness cover.
Income protection is a plan that aims to pay you a monthly income should you fall ill and be unable to work. This plan is only available as a single policy.
Learn more about income protection.
Indexation is also usually available on certain business protection products.
Learn more about business protection products.
Unfortunately there is no one correct answer for all, and the answer will depend on your circumstances. If you are purchasing a plan to protect your loved ones for a long period of time, then adding indexation to your policy could be important to you, as it ensures the money still has the same level of value as time goes on.
If you are still unsure, then please consider speaking to an adviser, as they can make a recommendation for you based on your personal circumstances.
You may also be interested in the following articles:
What kind of life insurance plan is right for me?
How to choose the right life insurance plan
Term life insurance: How does it work?
Give our advisers a call today.
Our team of friendly and professional advisers are on hand to help with any questions you may have regarding Life Insurance.
The advisers can also make recommendations tailored to your current situation and will research the market on your behalf, ensuring you secure the cover you need and supporting you every step of the way.
01392 43 61 93(Monday to Friday, 9am - 5.30pm)
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