Money Minder UK

How can I protect the value of my policy against inflation?

A common concern for those taking out life insurance policies is the affect inflation can have on the real value of the payout their family might receive in the event of their death. While the amount payable can seem like a healthy sum today, ten years from now you might find that the amount payable in real terms to your dependants then may not be enough for them to pay off all of their debts then or maintain their standard of living.

Fortunately there is a way of helping to prevent inflation eating away at the benefits payable from a life insurance policy over the term of the plan and it is called indexation.

Indexation is a facility offered by many life insurance providers and allows you to maintain the buying power of the potential benefits payable.

With indexation, normally the premiums (and therefore the benefits payable) are linked to one of the indicators of inflation - these are usually the Retail Price Index (RPI), or the Average Earnings Index (AEI). This means the value of your policy increases in line with inflation each year so the buying power of the money should maintain their value in real money terms how ever far in the future death occurs.

You will usually need to opt to add indexation at the start of your policy and it is important to be aware of this when you apply for your life insurance plan as it is not common practice for providers to allow you to add indexation to your plan at a later date.

The good news is that if you can include it from the outset, if the amount payable grows to much and the cost of the premiums are becoming a concern, it is not normally to difficult to cancel this added benefit at a later date if you decide that it's no longer necessary and you want to save some money.

Next: What happens if my life insurance needs change?

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