Royal London has called on customers to consider inflation proofing protection policies when addressing their protection needs and when reviewing policies already in place.
The call follows inflation hitting its highest levels since 1982 last month.
Highlighting the importance of index linking, the insurer explained that protection policies were typically taken out to provide cover for several decades, especially income protection (IP) policies, which can be in place throughout someone’s whole working life.
The mutual added that if the sum assured does not increase, then if there was a claim the value could result in a shortfall of what was previously thought necessary.
Index linked policies mean the sum assured is increased to keep it in line with inflation, or by a fixed percentage each year.
Most customers choose the retail price index (RPI) as the measure of inflation, but some select to increase their cover by a fixed amount, typically between 1% and 5%, the insurer noted.
Keep pace with living costs
Royal London argued that index linked life insurance, IP or critical illness cover can be a valuable option to keep the level of cover at the same rate as the real cost of living.
“Each year, a nominal rise in premium increases the potential pay out, ensuring it keeps pace with higher living costs or salary,” Royal London said.
The mutual added this was particularly important for income based protection products, such as IP and family income benefit. With these types of policies, the level of pay out is selected to maintain a chosen level of lifestyle.
Jennifer Gilchrist, protection specialist at Royal London, (pictured) said: “It’s concerning the rate at which costs are going up, but it shows how important it is to consider opting for cover that factors that in and increases in line with inflation.
“Making that decision ensures that an individual’s level of cover keeps pace with the real cost of living, further strengthening the security of their financial safety net.
“Indexation is really worthwhile considering because it builds in value and customers know that for a relatively small increase in premium each year, their sum assured is kept in line with costs.”
She added that it was also likely to be much more affordable and manageable than changing cover every few years and that the annual reminder helped to keep customers better engaged with their cover.
