The advantages to adding indexation

29 July 2020
Put simply indexation is the same as a normal, level insurance policy, but the sum assured increases each year.

I think indexation is a word that some advisers and certainly clients gloss over in the fine print when looking at an insurance policy, however I wanted to remind us all of the massive advantages indexation included in a policy can offer  your clients, particularly for income-based covers.

Why add indexation?

Indexation comes into its own when we are looking at income-based insurance policies, such as income protection and family income benefit.

By adding indexation you add the reassurance that should your clients need to make a claim in years to come, the pay-out is likely to better reflect the standard of living at that time. The value of the policy increases by a set amount over the duration of the plan which means that your clients should be in a better place to keep their family and lifestyle secure.

The cost is slightly more expensive to start with and will increase each year, but this is only fair as the amount paid out in the event of a claim is significantly higher than on a non-indexed policy. (Most providers offer indexation at RPI or a fixed amount, normally between 1 and 5%.) 

When should you add indexation?

Personally I think indexation should be considered on all policies that provide an income. This is because it's even more important that the value of the policy keeps track with our standard of living.

You may have had the very best intentions, but if a claim came 15 or 20 years into a long-term plan, without indexation, the monthly income claimed for may not be anywhere near the amount needed to come close to maintaining  a family’s lifestyle, making the plan unfit for the purpose it was designed for.

Let me just remind us all that on an income-based policy - whether we are looking at life cover, life or critical illness, or stand -alone critical illness - there will be a slight increase in premium from outset.

Policy holders are, generally, able to cancel indexation at any stage and, some providers (including Royal London) cancel the indexation option completely if the customer refuses the indexation increase for two years consecutively. 

Too good to be true?

The way in which a few insurance providers, including Royal London, treat indexation on an income based policy could certainly be seen this way. Let me explain: 

The life assured takes out a family income benefit (FIB) policy for their family should they die prematurely. Let's say the plan is for £10,000 per annum over 25 years.

If they took the plan as a level-based cover, they should expect the family to receive £10,000 a year, each year, until the plan ends. On an indexed plan, they could expect the monthly income to be higher at the point of claim, and the benefit would continue to increase until the end of the plan.

It gets more interesting if the plan started out as an indexed plan, and then indexation was cancelled.

You would probably expect the plan to have continued to increase in value up to the point indexation was lost, and then for the sum assured to remain level. However some insurers, including Royal London, will, at claim, continue to index the annual benefit each and every year until cover ends taking the view that indexation was chosen at outset and a slightly higher premium paid. This results in a significant increase in the monthly income and most importantly the total amount received at claim.

So particularly for income based covers, such as income protection and family income benefit, let’s not forget the huge advantage adding indexation could provide. Even if your clients never take up the annual increases.

We all hope that your clients and their loved ones will never have to make a claim on the policy you put in place for them, but sadly if they do, your client’s families will be so glad you added indexation. 

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About the author

Shelley Read

Senior Protection Development and Technical Manager

Shelley has worked in financial services for over 25 years, starting her career in the Mortgage world and then from 2008 in protection field Face to Face Sales. Shelley was originally with Bright Grey and Scottish Provident and latterly representing Royal London in the West Midlands and Warwickshire area. Shelley moved to her current team in July 2017 and now covers all of the UK. Shelley is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Shelley therefore has an in-depth knowledge of the mortgage and protection market and her strengths have been training and coaching advisers to recommend protection solutions to their clients and delivering this coaching in an easy to understand and simple way. Shelley’s area of expertise also includes Family Protection and Business Protection. Shelley hosts a monthly book club in Sutton Coldfield and also enjoys attending various cookery courses both at home and abroad to improve her cooking skills and her love of entertaining friends and family.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.