Blog post by Empower Wealth

What is indexation and how does it work?

Indexation is an optional benefit on life insurance policies designed to ensure you’ll always have the same financial freedom in the event of a claim.

Not all insurance policies offer indexation. But for those that do, it works by offering you an increase to the sum insured in your policy at each policy anniversary. This increase is designed to help your insurance benefit keep up with the rising cost of living.

How the increase works

For certain product, the amount of your increase is calculated in the following way:

For lump sum policies

Such as life cover, TPD cover and trauma cover the greater of:

The ‘indexation factor’ which we determine each year based on the percentage increase in the Consumer Price Index (CPI) or A percentage amount we choose to offer, if no CPI amount is released by the government
A fixed percentage of 5%

For income protection policies

Indexation increases are related only to CPI
Should indemnity cover also be held, accepting indexation may mean that you’re over-insured

One thing that’s important to know is that as your cover increases, the premium you pay generally will also increase.

In the end, you’re in control

Indexation is optional and whether you accept it is up to you.

If you’d like to decline it in any given year, you simply need to let your insurer know – usually within 30 days of your policy anniversary. You may even be able to stop indexation permanently, but bear in mind you may need additional medical checks if you wish to turn it back on.

Want to know more? If you’d like to discuss any of the content in this article and how it may apply to you, our Financial Planning team would love to help! Request for a free appointment via the form below:

Book your free Appointment

Categories: Financial Planning, Investment Education, SMSF Advice

Tags: Age Index, Financial Planning, investing, investing for retirement, Investment Class, Superannuation