Life insurance, such as death cover, income protection, critical illness, and total and permanent disability insurance, allows you to plan ahead to protect your lifestyle and your family’s financial future. Indexation, or inflation protection, is an optional feature that can be included in your life insurance policy to safeguard the value of your benefits from the effects of inflation.
Inflation is the rise in the cost of living over time. The consumer price index (CPI) is an indicator of inflation. It compares the price of a ‘basket’ of goods and services typically consumed by households, with its price in the previous period. In Australia, the Australian Bureau of Statistics (ABS) calculates and publishes this once a quarter.
According to the ABS, in the last year from July 2022 to June 2023, food and non-alcoholic beverages went up in cost by 7.5%, housing went up by 8.1%, recreation and culture went up by 6.8%, education went up by 5.2% and health went up by 4.9%. This shows how inflation affects the costs of daily expenses.
Understanding inflation proofing
To help your insurance cover keep pace with the rising cost of living, insurers may automatically apply indexation, which increases the amount of certain benefits each year on your review date, in line with the CPI. This means that your cover amount may increase each year to keep up with inflation. And as your cover amount increases, your premiums will, too.
Benefits of opting for indexation
Indexation could future-proof your life insurance benefits and preserve their real value and purchasing power.
This means that if you ever have to make a claim, you and your loved ones can receive a payout that is still meaningful and relevant – even years down the line.
If affordability is a concern, keep in mind CPI increases are optional: generally, you can choose to turn this feature off at any time (permanently or temporarily) if it’s currently applied to your policy and reduce your premiums in the future.
Change to lifestyle considerations
There are some circumstances where inflation protection may no longer be needed. If your children are grown up, your mortgage is paid off or you’ve downsized, you may not need as much cover and could consider removing the inflation protection from your policy and reducing your premiums.
Everyone’s situation is different. If you’re unsure about what’s best for you, reach out to me for professional advice.
We can help assess your needs in the years ahead and whether your current benefit amount reflects those needs now and into the future; book a discovery call here.
Any advice is general in nature only and has been prepared without considering your needs, objectives or financial situation. Before acting on it you should consider its appropriateness for you, having regard to those factors. Before making any decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement.