By David Wilkinson (TAL)
Indexation is a complex-sounding term that is used to describe a relatively simple concept in the world of insurance. Here we’ll break down exactly how it can benefit you.
In a nutshell, indexation refers to a benefit payment that increases in proportion to the cost of living.
If the cost of living increases by 5% in a given year, an indexed insurance benefit will also increase by 5% so that you, or the listed beneficiary, – don’t lose out on purchasing power when the cost of living increases. Indexation automatically increases your Life Insurance cover amount by 5% every year, or by the Consumer Price Index – whichever is greater.
The “index” that indexation references is usually the Consumer Price Index (CPI), which is a group of statistics that measure the cost of living in Australia. The statistics measure the average price we pay across a wide variety of goods and services, including:
When the average price of the goods and services included in these categories increases, the Consumer Price Index increases to reflect that.
Insurance policies that are indexed to the Consumer Price Index will increase in their benefit payout at the same rate.
Are all insurance policies indexed?
The short answer is no.
But the good news is you have the power to choose whether your life insurance policy is indexed when you take out your policy.
Adding indexation to your insurance policy can be a great way to help future-proof yourself and your benefit amount against the rising cost of living.
Level Premiums, in a nutshell, means that your premium stays the same year on year.
However, as your cover increases with indexation, the cost of that new cover will be added to your premium.
One important thing to note for Level Premiums is that the additional indexed premium for the increased cover is based on your age at the time of the increase – not at the time you took out your policy.
Stepped Premiums, on the other hand, means that the amount you pay in premiums increases each year as you get older.
That means the premiums will additionally increase in line with indexation.
However, many people find the price tag is often worth the peace of mind to help secure their financial freedom.