Inflation in 2024 - 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. The cost of living increases as inflation rises, meaning that the same amount of money buys fewer goods and services than before.
As of September 2024, the current rate of inflation in the UK is 1.7%.
Usually people measure inflation by comparing the price of things today with how much they cost 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 now may well not buy you the same amount of ‘stuff’ in 2042!
If you bought life insurance to help your family with living costs or to cover a funeral or other expenses, these expenses are likely to increase over time.
The same goes for the premium cost of a future policy if you decide to buy cover later. If inflation continues to rise, you may find that the premiums for new life insurance policies are higher than they would be today.
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.
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What is ‘indexation’?
Simply put, indexation (sometimes also known as an increasing life cover or index linking a policy) is an optional add on to a normal level term 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 the impacts of inflation.
Indexation is not available for Decreasing Term Life Assurance policies.
How does it work?
When you include indexation on a level term life insurance policy, the sum assured increases annually and your monthly premium will also increase too.
If indexation is included in your policy, your provider will typically write out to you annually to inform you of the new sum assured (pay-out amount) and what your monthly premium is going to be.
Most providers offer indexation at RPI (Retail Prices Index), CPI (Consumer Price Index) or a fixed amount, which normally falls between 1 and 5%. Typically there is also a maximum amount that your cover and premiums can increase by.
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.
Should I review my cover?
If you feel your current life insurance policy may not adequately meet your future needs, we recommend reviewing your policy where necessary. Factors such as changes in living costs, family circumstances, or financial obligations can be impacted over time and you may need to adjust your cover.
When you review your policy, it's important to think about your current financial situation, any changes in your family's needs, and how inflation might affect your future expenses. You may need to increase your cover amount or consider adding options like indexation to ensure that your policy remains sufficient.
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:
With our help, you could find the right life insurance policy that suits your needs, including options for indexation to protect against inflation.
Speak to the experts...
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, Critical Illness Insurance and Income Protection.
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.
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