A look at increasing and index-linked term policies

Insurance is a long-term interest. The coverage level you have now may seem reasonable and adequate to cover your family’s needs. You have studied just how much would be enough to pay for the bills, as well as pay for all or a portion of your family’s debt.

Inflation can eat away life insurance proceeds

However, you should also take into consideration the fact that inflation can cause your “adequate” amount to be smaller. With inflation eating away at your sum insured, the actual value of the sum insured will be less in the future.

Your family’s increasing financial needs:

Also, your family’s standard of living may increase over time. Some examples include:

• Moving to a bigger house, with a bigger monthly mortgage payment
• Adding a new member to your family
• Taking on the responsibility of caring for aged parents

The current level of insurance coverage you may have may not be enough to address these growing financial needs.

Keeping Your Insurance Cover in Line with Your Needs

To provide a hedge against inflation and help ensure that the amount of insurance is roughly in line with what your family needs, you can do one of two things:

• Update your life insurance coverage by buying a new policy on top of your existing policy. The drawback is that at the time that you buy your new term life cover, the premiums will be more expensive than the premiums you have on your existing policy, where premiums may be guaranteed for the duration of the cover. Also, getting a new policy means a new waiting period (where your claims can be denied because of your medical condition).
• Get an increasing term life insurance or an index-linked term life insurance cover.

How does an increasing term or index-linked insurance work?

Increasing Term Insurance

This increases the sum insured based on a specified rate. The increase is applied every policy anniversary. There are also some increasing term insurance policies that apply a fixed increase per policy anniversary. Policy anniversaries can be annual or every five years.

Index-linked Term Insurance

This is similar to the increasing term insurance, however the increases are based on the rate of inflation as indicated by the UK Retail Price Index. For this, the insurance is bought in units and the increase is applied for every unit.

Premiums.  Of course, since your sum insured increases regularly, you can also expect your premiums to increase. But the advantage is that the premiums will be based on your current premium ratings. If your health takes a turn for the worse, you will still pay for the same premium ratings.

The drawback to this is that like all term insurance policies, it provides only a temporary cover. There is no cash value and regardless of how much you have already paid out in premiums, if you survive the coverage period, there is no refund on your premiums.

To secure your family's future, fill in the form on the right and get your term life insurance quote now.