What is indexation in life insurance?
Indexation is an optional extra that can be added to life insurance policies. When added at the beginning of your policy, there’s no extra cost for the first year.
Having life insurance in place is vital to protect yourself and the ones you love, but the process of taking out a life insurance policy can leave many people confused. However, here at bonkers.ie we want to make the process more straightforward.
When purchasing a life insurance policy, you’ll have the option to include a variety of additional extras, such as serious illness cover, or a convertible term option. Indexation is another optional extra that you may also come across.
What is indexation?
Put simply, indexation allows you to increase your life insurance cover in line with inflation.
Indexation ensures that the benefits of your life insurance policy increase by a certain percentage every year to keep up with inflation, which helps to protect the real value of your cover over time.
Why should I add indexation to my policy?
Adding an indexation option to your policy will ensure that the value of your policy will keep up with the standard of living. This is especially important if you base your life insurance policy on your income, so you should factor in how much your income may increase in the future when considering indexation.
If you have a policy without indexation and make a claim after 20 years, you may find that the payout is not enough to protect your family financially or maintain their lifestyle, due to a rise in the cost of living. Essentially the policy is then not fit for purpose.
Does everyone need indexing?
Indexing may not be right for everyone. If you take out a life insurance policy later in life, you might not feel the need to add it on. There are numerous reasons for this.
- Approaching retirement: If you’re approaching retirement, you’ll have less income to replace and will have a pension fund or savings built up.
- No mortgage repayments: You may have already paid off your mortgage, so don’t have any outstanding repayments.
- No dependants: If your children are grown up, they’re likely to be financially independent and less reliant on you for money.
However, if you’re younger and have children or others that you support financially, adding indexation to your policy might be a smart move.
How much will the cover increase by?
The amount your cover will increase annually is insurer dependent. Many insurers will increase the sum insured by around 3% each year until you turn a certain age, e.g. 75.
Each provider increases the sum insured and premium differently, so it’s best to check with individual insurers to see what percentage increase suits you best.
How much is indexation?
If you choose to add indexation to your cover, you’ll pay an extra cost. This will vary from insurer to insurer.
The cost of your policy will go up each year, as will your cover. However, your cover will increase at a lower rate.
For example, your cover may increase by 3% annually, while the cost of your premium may increase by 4% annually, which is standard among many insurers.
Your premium may seem quite affordable and the monthly payments appear quite low initially, but keep in mind that it will gradually increase throughout the duration of your term and can prove costly in the long run.
Can I opt-out of indexation?
When you opt for indexation, your insurer will write directly to you every year and ask if you want to keep your indexation active or not, so you’ll have the opportunity to opt-out if you wish.
Some insurers will allow you to decline the automatic indexation increase for a year, but if you decline the increase for two years in a row, the indexation option will be removed from your policy.
Compare life insurance policies on bonkers.ie
If you’re looking to take out a life insurance policy, make sure you check out our easy-to-use life insurance comparison service. With our service, you can review quotes and benefits from Ireland’s main life insurance providers.
Once you have selected the right life insurance plan for you, it takes just minutes to complete your application. You could even be covered within an hour!
Find out more about life insurance
To discover more about life insurance, take a look at some of our other helpful articles:
- You can learn all about life insurance in this guide.
- To learn about the importance of life insurance, take a look at our guide on the benefits of life insurance.
- In this guide, we outline a list of the most common questions asked by consumers when taking out a life insurance policy.