Indexation is an important aspect of life insurance which many people may not fully understand. It refers to the adjustment of a policy's sum insured in line with inflation, ensuring that the coverage keeps pace with the rising cost of living. However, it’s worth knowing more accurately how it works and whether it may apply to your policy.
You can delve more into the concept of indexation in life insurance and explore how it functions right here with Savvy. In doing so, you can increase your understanding of inflation proofing and determine whether it’s worth the effort to have it locked in on your life insurance.
What is indexation in life insurance and how does it work?
Indexation in life insurance (also known as inflation protection or inflation-proofing) is an option which can be added to your policy to ensure your coverage keeps up with the inflation rate. The inflation rate in Australia can cause the cost of living to increase and, with it, the cost of goods and services. Therefore, it’s important to ensure your policy doesn’t lose value over time as a result of inflation.
Indexation works by increasing the sum insured each year in line with the consumer price index (CPI). The CPI measures changes in the cost of goods and services over time, providing an indication of inflation. For instance, if the cost of living increased by 3% in a given year, a policy with inflation-proofing would have its covered amount increased by that same rate.
Indexation is an optional benefit which can be added to most life insurance policies, sometimes for an additional cost. The benefit of indexation is that it can provide peace of mind that the coverage you purchased will keep up with the cost of living and you won't have to worry about increasing your coverage or taking out a new policy in the future.
Overall, indexation is a useful option to consider when purchasing life insurance, as it helps your policy maintain its value over time. If you’re unsure if indexation is right for you or whether you can add it to your policy, it’s worth speaking to your insurer.
Are all life insurance policies indexed?
No – not all life insurance policies in Australia have an indexation option, as this can vary depending on the insurer and the specific policy. Some policies may offer indexation as a standard feature, while others may require you to add it as an optional extra. It's important to read the Product Disclosure Statement (PDS) for each policy you're considering to help you determine if indexation is included and what its terms and conditions are.
It's also important to note that even if indexation is offered, it may not apply to all aspects of the policy. For example, if you have a bundle of several types of cover, your death benefit may be indexed, but your total and permanent disability (TPD) benefit may not be. It's essential to understand which parts of your policy are indexed and how this will affect your coverage and premiums over time.
If indexation isn’t automatically included in your policy, you may be able to include it as an added extra or policy rider. This may increase your premiums, but it can provide added protection against inflation and help ensure that your coverage keeps up with the rising cost of living. It's important to weigh up the costs and benefits of inflation-proofing carefully and consider your long-term needs when deciding whether to add it to your life insurance policy.
Will indexing my life insurance’s covered amount increase my premiums each year?
Yes – your life insurance premiums will generally increase each time your coverage is increased through indexation. Since the covered amount increases annually to keep pace with inflation, the premiums for indexed policies are generally higher than those for policies without indexation. This is the case for both stepped and level life insurance premiums, with each rising to accommodate any increase in your covered amount.
However, the increase in premiums may not necessarily be significant and it’s important to consider the benefits of having an indexed policy against the cost. Some policies may offer the option to turn off indexation at any time to reduce premiums if needed.
It’s also worth noting that some policies may have a maximum indexation rate, meaning the covered amount will only increase up to a certain percentage each year. This can help to limit the premium increase while still offering some protection against inflation. It's important to carefully review and compare policies and their terms and conditions before deciding on whether to index the covered amount or not.
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