Index linking protection policies should be considered as inflation reaches 40 year high

Inflation proofing protection policies should be a consideration for customers addressing their protection needs and those reviewing what they already have.

Protection policies are typically taken out to provide cover for several decades, especially income protection policies, which can be in place throughout someone’s whole working life. If the sum assured doesn’t increase, then the value, if there was a claim, could result in a shortfall. Index linked policies mean the sum assured is boosted to keep it in line with inflation, or by a fixed percentage each year. Most customers choose the Retail Price Index (RPI) as the measure of inflation, but some select to increase their cover by a fixed amount, typically between 1% and 5%.

Maintaining the real value of protection insurance

Index linked life insurance, income protection or critical illness cover can be a valuable option to keep the level of cover at the same rate as the real cost of living. Each year, a nominal rise in premium increases the potential pay out, ensuring it keeps pace with higher living costs or salary.

This is particularly important for income based protection products, such as income protection and Family Income Benefit. With these types of policies, the level of pay out is selected to maintain a chosen level of lifestyle. It is vitally important that the monthly income is able to pay for the things it was intended for at the outset.

Jennifer Gilchrist, protection specialist at Royal London, said:

“It’s concerning the rate at which costs are going up, but it shows how important it is to consider opting for cover that factors that in and increases in line with inflation. Making that decision ensures that an individual’s level of cover keeps pace with the real cost of living, further strengthening the security of their financial safety net.

“Indexation is really worthwhile considering because it builds in value and customers know that for a relatively small increase in premium each year, their sum assured is kept in line with costs. It’s likely to be much more affordable and manageable than changing cover every few years. The annual reminder also helps to keep customers better engaged with the cover they have in place.”