Question of Finance: How will inflation affect my life insurance?
Published 14/10/2010 | 05:00
Q: My wife and I took out a life insurance plan several years ago and I feel secure in the knowledge that it's there if one of us should need it.
However, there has been talk in the media of inflation beginning to rise again from next year. From what I can see this will have an affect on my plan.
If I want to protect my policy against this, do I need to increase my level of cover?
A: While increasing your level of cover may work, it could also prove to be a costly solution and it would be difficult for you to ascertain what level of cover you need as the inflation rate changes periodically.
Index linking, or indexation, is designed to combat the problem you outlined.
It increases the benefit on your life assurance or investment policy automatically, to make allowances for inflation. As a result, your premium is adjusted in line with your increased cover.
The rise in the general cost of living over the years can eat away at the real buying power of your plan.
So what was adequate and sufficient cover, when you first took out your policy, may not meet your family's needs now and in the future.
Inflationary rates can fluctuate, from the very low rates we have at present to the very high rates we saw in the 1980s.
Taking this fact into account, it's important that people realise the effects of inflation and the options available to protect against it.
Selecting an 'indexation' option on your life assurance plan allows you to maintain the real buying power of your cover against the negative effects of inflation.
I would strongly advise speaking to a broker to get advice on which company is offering the best long-term option for you.
- Joe Charles, Caledonian Life.