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What is an Index-linked Policy and is it Different to Standard Life Insurance?

An index-linked policy is a type of life insurance that is linked to the performance of a specific financial index, such as theConsumer Price Index (CPI) or theS&P 500. The value of the policy is tied to the performance of the index, and typically increases or decreases in line with this. The monthly premium for an insurance policy with an index-linked benefit may increase over time depending on the rate of inflation. The specific way in which the premium is affected will depend on the details of the policy, such as the rate of index-linking and the frequency of which the end benefit (total paid out to your family when you pass) increases.  In general, the premium will be adjusted periodically to reflect changes to the cost of living. It’s important to note that before any change to your premium or end benefit is made, your insurer or broker will be in contact to confirm these changes. You can decline the inflation rate and your premium and end benefit will stay the same. There is normally a limit to the number of times you can decline the index-linked change, before the benefit is removed from your policy. 

Why Choose an Index-Linked Policy & The Risks Involved?

Index-linked products can provide a way for individuals to protect against inflation and ensures they have a policy that keep pace with the cost of living, but they also come with some risks. The value of the policy or investment will rise and fall with the index, and if the index performs poorly, the policyholder may receive less than they expected. Most insurers now offer index-linking but not all, if you are looking for an index-linked policy and have a pre-existing medical condition its best to callthe Insurance Surgery and we can search the whole of market for the best solution.

Recap, what do we know so far:

  • Index-linked cover will adjust your monthly premium with inflation
  • Your broker or insurer is obligated to inform you of the increase to your premium
  • You will be given the choice to accept or decline the financial index change

Standard life Insurance in Comparison to Index-linked Cover.

  • The main difference between the two is that standard life insurance provides a fixed total as agreed when the policy was taken out. The end benefit will not be linked to any external factors and the premium will be fixed. This can mean that over time the total does not align with inflation and may not cover as much as expected when the policy was taken out, due to the rise of inflation. 
  • Index-linked cover can provide a way for individuals to protect their beneficiaries against inflation, but it also comes with some risks. The value of the end benefit will rise and fall with the index, and if the index performs poorly, the death benefit may be less than what the policyholder expected.
Choosing what type of cover works for you, will largely depend on the level of risk you can afford to take.  For more information, give us a call or complete the quick quote form to discuss your options further.
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