Inflation in 2022 - it's something we're all talking and thinking about, but what does it actually mean, and how could it impact on your life insurance policy?
In this article, we hope to shine a light on the hot topic of the year and help you protect your plans from losing their value.
What is inflation?
Inflation is a measure of how the prices of goods and services are changing over time, and it can have a big impact on people’s household finances.
Usually people measure inflation by comparing the price of things today with how much they costed a year ago. The average increase in prices is known as the inflation rate.
So, if inflation is 4%, it means prices are 4% higher (on average) than they were a year ago. For example, if a pint of milk cost £1 a year ago and now it’s £1.04 then its price has risen by 4%.
What impact might inflation have on a life insurance policy?
Simply put, if the cost of everyday goods and services go up over time, but the sum assured of your life insurance policy remains the same (is on a ‘level term’ basis): then its value in real terms may erode over time. For example, the amount of ‘stuff’ that £100,000 can buy you in 2022 may well not buy you the same amount of ‘stuff’ in 2042!
However, there are ways to protect the value of your level term life insurance policy pay-out over the course of time - with one of the most popular options being to add ‘Indexation’ to the policy.
What is ‘indexation’?
Simply put, indexation (sometimes also known as an increasing life policy or index linking a policy) is an optional add on to a normal level life insurance policy whereby the sum assured increases annually. The monthly premiums you pay will increase too, to account for this.
The aim of indexation, when it comes to life insurance, is to try and help combat the effects of inflation and protect your policy pay-outs' value from eroding over time.
Indexation is not available for Decreasing Term Life Assurance policies.
The measure used to increase your pay-out and the maximum that your cover/premium can increase by should be detailed in your Policy Summary/Key Facts Document, so be sure to read through these carefully and contact your chosen provider directly should you have any questions.
It is also worth knowing that policyholders are, generally, able to cancel indexation at any stage and they may also have the option to refuse the indexation increase offered by their provider. HOWEVER, the way each provider treats refusing the proposed increase can vary; for instance come providers cancel the indexation option completely if the customer refuses the indexation increase. We strongly suggest getting in touch with your provider directly to ensure you are making an informed decision should you wish to refuse the indexation increase offered.
What type of policy can Cavendish Online help me with?
Cavendish Online can help you with a whole range of policies over the phone, where the indexation option may be added, including:
Term Life Insurance
Family Income Benefit
Whole Life Insurance
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