Why a fixed sum shrinks in real terms
Say you take out level cover today to pay for your family's living costs if you die. Twenty years from now, the same sum will still be paid, but food, energy and rent will cost more. Your family would get the number you chose, with less to show for it.
This matters less when the cover is there to clear a mortgage, because the debt itself does not grow with inflation. It matters more when the cover is meant to replace income, pay for childcare or fund university, because those costs tend to climb.
Inflation moves at an uneven pace. Some years prices barely shift and others they jump. Over the length of a typical family policy, even modest yearly rises add up to a big change in what money buys. A payout that looks generous on the day you sign can feel thin by the time your family needs it.
How index-linking works each year
On each policy anniversary, the insurer raises your cover by the change in its chosen inflation index, sometimes with a cap or a floor. It writes to you before the increase, showing your new sum assured and new premium. You do not need to answer health questions again for these increases.
Your premium goes up by more than the inflation figure. Part of the rise pays for the extra cover and part reflects that you are a year older, so the extra cover is priced at your current age. Over a long policy, this adds up, and you should plan for it.
Check which index your policy uses and whether there is a cap. The Retail Prices Index has tended to run higher than the Consumer Prices Index, giving larger increases and larger premium rises. A cap limits how much your cover can grow in a single year, which protects your budget when inflation spikes but can leave the cover lagging behind.
Saying no to an increase
Most policies let you decline an increase if money is tight that year. Read the terms before you do. Some insurers allow one or two refusals, then remove the index-linking for good. Others stop it after the first refusal.
Once index-linking has gone, getting more cover means a new application with fresh medical questions at your new age. If your health has changed, that could be harder, so think twice before turning down an increase you can afford.
How Hi Tomorrow decides if index-linking suits you
We start by asking what the cover is for. Mortgage cover rarely needs index-linking. Family income cover often does. We then show you how the premium is likely to grow and compare it with level cover at a higher starting sum, which can be the better fit for some budgets.
Where you have several needs, we may suggest splitting them across two policies, one level and one index-linked, so each part of your cover does its own job.
Another option is to start with a higher level sum than you need today, allowing for some rise in costs. Your premium stays flat, which suits people who like a fixed budget. The trade-off is that you pay for extra cover in the early years, when you need it least.
- Replacing income for your family
- Paying for childcare or school years
- Long policies of twenty years or more
- Family income benefit, where many plans can rise with inflation