What is indexation and how does it work?

Indexation automatically increases your cover to help fight inflation. Here’s what it means for your cover and your premium.

Indexation is an optional benefit on life insurance policies designed to ensure you’ll always have the same financial freedom in the event of a claim.

Not all insurance policies offer indexation. But for those that do, it works by offering you an increase to the sum insured in your policy at each policy anniversary.

This increase is designed to help your insurance benefit keep up with the rising cost of living.

Insurers differ slightly, but generally speaking the benefit increase is calculated at policy anniversary, the benefit ‘sum insured will automatically increase by the greater of either;

•      The applicable current Consumer Price Index (CPI), or

•      by a fixed percentage the insurer has published in their PDS, generally between 3% and 5%.

One thing that’s important to know is that as your cover increases, the premium you pay will generally also increase.

Indexation is optional and whether you accept it is up to you.

If you’d like to decline it in any given year, you simply need to let your insurer know, usually within 30 days of your policy anniversary. You may even be able to stop indexation permanently, but bear in mind you may need additional medical checks if you wish to turn it back on.