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Everything you need to know about index linked cover

News article

Publication date:

05 August 2022

Last updated:

05 August 2022

Author(s):

Protection Guru

With inflation at a 40 year height and rising living costs hitting individuals and households, index-linked protection insurance is a recurring conversation we’re having with advisers. On the one hand there is an obvious case to be made for why index-linked cover is essential, in shielding the value of a clients policy from being eroded by inflation. On the other hand advisers and their clients are rightly concerned about steep premium increases where policies do include this benefit, which in some cases could be unaffordable and force clients to simply cancel their policy entirely.

In this series of insights we’ve taken a deep dive into indexation and focused on some of the reasons why we believe it to be a valuable and in some cases essential recommendation, in what way the clients premium will be effected and how they can opt out if they wish to. We’ve also taken the opportunity to highlight a claim case study we first published in 2021, which provides a clear example of why the value of indexation on income protection plans.

WHY INDEX-LINKED COVER IS AN ESSENTIAL POLICY BENEFIT

The value of index-linked cover is in protecting the long-term purchasing of the clients sum-assured/monthly benefit. This is true for most protection policies and arguably essential when it comes to income protection. In this insight we examined some of the reasons why indexation should be recommended and why it’s important to properly explain to the client how it works.

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HOW WILL A CLIENT’S PREMIUM BE EFFECTED BY INDEX-LINKED BENEFIT INCREASES?

When selecting index-linked cover the client’s premium will increase each year to reflect those rises in the level of cover. How much the premium increases by though varies across the market, with applying different increase calculations. In this insight we examined in detail some of those differences and what they mean for the clients premium and also included a handy calculator to help advisers compare insurers when it comes to indexation premium increases.

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HOW FLEXIBLE ARE INSURERS IF CLIENTS WISH TO OPT OUT OF INDEXATION INCREASES?

As we established in the previous insight, insurers will increase the client’s premium when applying indexation increases and when, as is the case now, inflation is particularly high this could mean steep premium increases. Giving clients some flexibility to opt out of indexation increases means they can keep premiums affordable at what might be a financially difficult time, without losing the benefit entirely. In this insight we looked at what options insurers give clients when it comes to those opt outs and which insurers are the most generous in their approach.

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LV=’S 35 YEAR INCOME PROTECTION CLAIM… THAT IS STILL BEING PAID

Talking about policy features and benefits with a client can often feel a little abstract and because most people hope to never claim on their policy, the value of benefits like indexation can potentially be disregarded. Real life claim stories help to bring to life the reality of why protection insurance is important and in many cases also highlight the value of certain policy features and benefits. This 35 year claim story highlights a number of things, but in this context why we believe indexation is an essential IP recommendation.

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This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.