September 21, 2020


The benefits of an Index-linked life insurance policy

Why index link your policy?

When people arrange life insurance cover, an important consideration which is often overlooked is the effect that inflation will have on the benefit as the years go by.

If you had chosen to arrange a £100,000 life policy when you were 30 years old, imagine what it’s real value would be if a claim was made 35 years later? It’s fair to say that the £100,000 won’t go as far as you were hoping if you take into account the rise in the cost of living.

An example of inflation using figures from the Office of National Statistics (2012)

  • In 1982 (over 30 years ago) a litre of fuel cost about 35 pence* (by 2017 it had risen to £1.20 per litre)
  • The average price of a house in the same year was £24,177 (by Jan 2017 it had risen to £235,000)**

How does index linking a policy work?

Arranging cover with an ‘index-linked option’ allows the policy benefit to increase on an annual basis. This helps to offset the effects of inflation. Most policies can be arranged to increase in line with the retail price index, or in the case of some insurers, by a specific percentage eg 5 per cent per annum.

As your sum insured increases, your premium will also rise to reflect the increased benefit. If your policy premium is not increasing each year, it is worth checking your paperwork to check whether your policy is indexed or not.

If your policy was arranged to provide your partner or family, it is important to arrange your policy with an indexation option. As time goes by the real-time value of the pay-out will decrease because of the effect of rising prices (inflation). We normally recommend an index-linked policy.

Index linking your Life Assurance policy will allow it to maintain its value

You only have to look at your weekly shopping bill or the cost of fuel to see how prices have increased over the years.

If you find out that your current policy is not index-linked or would like us to look into this on your behalf, please give us a call. We are also happy to discuss the pros and cons of changing to a policy that has this option.

We have current knowledge of the changing landscape of underwriting of all providers in the UK. Researching, so that you don’t have to. What’s more our advice comes at no obligation. Meaning you don’t pay us directly. We get paid by the insurer if you decide to start a policy with them. There are no hidden costs.

Am I locked into the annual increases?

In short – No. Most providers allow an ‘opt-out’. You will receive a letter from your insurance company every year informing you of your new premiums and benefits for the following year. At this stage, you can opt-out of the indexation, and your premiums and benefits will be frozen at their current levels.

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Other policies which are available and could well benefit from being index-linked are:

There are policies which may not need index-linking

A level term life insurance can be policy suitable with no index-linked option. The term ‘level’ means that the benefit will be a set or fixed amount which you will select when you take out the policy, eg £100,000. The premiums will not increase throughout the term of the policy.

Level term cover (without an Index Linked option) is usually suitable for someone who is taking the cover out to protect a loan or a mortgage (particularly if it was arranged on an interest-only basis). As the mortgage balance will remain unchanged being interest only, indexation may not be required.

Next steps

Whilst you are welcome to get a quote online, we would recommend you speak to one of our advisers.

Any quote that your adviser provides you with will take into account your circumstances and medical history, as well as your budget!

An online quote is just that – a quote – it isn’t a definite offer of cover. What really matters is the premium you are offered, after your application has been assessed.

Call Freephone 0800 644 4468 – Monday to Thursday from 09.00 to 19.00 and on Friday between 09.00 and 17.00.

Please feel free to read our Independent client reviews, or read about the team at Future Proof

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The benefits of an index-linked insurance policy

Take a look at our handy guides ‘What Cover is Right for me?’

Do you suffer from a medical condition and concerned you can’t secure Life Insurance?  Please view our ‘Medical Guides’ for further information.

Whilst we will make every endeavour to help someone to arrange insurance, there is no guarantee of success.  All applications are subject to underwriting.

Links to third-party websites exist for information only, and we accept no responsibility or liability for the information contained on any such sites.
The existence of a link to another website does not imply or express
endorsement of its provider, products or services by us or St. James’s Place.


** The Office for National Statistics 2012