Having life cover that guarantees a cash pay out to your loved ones when you pass away.
Having life cover that guarantees a cash pay out to your loved ones when you pass away.
Having whole of life cover that guarantees a cash pay out to your loved ones when you pass away.
By: Adam Futer
Protection Expert
10 min read
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Indexation life insurance is simply a type of life insurance that includes protection against inflation.
Over time, inflation can affect the buying power of a fixed life insurance pay out as the cost of living continues to rise. To help address this, some insurers offer an indexation feature that automatically increases your level of cover by a small percentage each year (typically between 1% and 5%) in line with increasing living costs.
For example, an indexed policy taken out 10 years ago with a cover amount of £200,000 could now have a pay out of around £250,000, based on a yearly increase of 3%.
Therefore, indexation helps to ensure that your policy maintains its real value over time and that any future pay out has the same buying power as it would today.
Continue reading this guide as we explain how indexation life insurance works, pros and cons and how to find the right policy for your needs.
Like other types of life insurance, indexed life insurance provides a lump sum pay out if you pass away during the cover period (policy term).
It’s designed to help your family manage financially without your support. The funds can help towards everyday living expenses, debts and funeral costs.
When life insurance has indexation, this is how it works:
The main feature of indexed life insurance is that the cover amount (the value of the policy) increases by a small percentage each year in line with inflation (the cost of living) to help ensure that your family are appropriately protected now and in the future
Your monthly premium cost will also increase by a small percentage every 12 months to reflect the higher cover amount
Your insurer will inform you in advance of the proposed increase, which you’re able to accept or decline. Although, declining more than 3 years in a row will remove the indexation option from your cover for the remainder of the policy term
Indexation life insurance typically increases by 1% to 5% on a yearly basis, in line with Retail Prices Index (RPI) or sometimes Consumer Price Index (CPI).
However, there are minimum and maximum percentage increases to bear in mind. For example:
What is the Retail Prices Index (RPI)?
The Retail Prices Index (RPI) is one measure of inflation.
It tracks the cost of living, showing how prices change over time for everyday items such as petrol, food and drink, and household bills.
The current RPI rate is 3% (for the 12 months to April 2026).
You can use this free inflation calculator from the Bank of England to see how living costs have changed since the 1200s.
With some policies, you may be given the option of fixed yearly increases instead of inflation linked rises.
For example, a fixed rate of 3% or 5% per year.
For monthly premiums, these also increase annually as per the RPI, CPI or fixed rate, multiplied by 1.5 (so +4.5% every 12 months).
Although, some insurers use other methods to work out premiums for indexed cover.
Indexation life insurance example
Based on an RPI of 3% over the next five years, see below how indexed cover and the cost of premiums could increase each year:
Year | Cover amount | Monthly premium |
1 (start of the policy) | £200,000 | £15 |
2 | £206,000 | £15.68 |
3 | £212,180 | £16.39 |
4 | £218,545 | £17.13 |
5 | £225,101 | £17.90 |
Here’s a breakdown of this indexation example:
The main types of life insurance that may have the option of indexation protection include:
Term life insurance
Term cover is often taken out by those who want to help protect a mortgage and/or future living costs during a specified term (such as 25 years). This makes it a good option for indexation, as your cover amount would keep rising with the cost of living, reducing the financial shortfall for your family if they needed to claim.
Whole of life insurance
Some insurers offer whole of life insurance with inflation protection. This type of policy pays out when you pass away. It’s designed to help cover future family living costs, funeral fees and inheritance tax bills (when written in trust). Therefore, it could make sense to include indexation and lock in the value of the policy, maximising the legacy you leave behind.
Other policies that can be index linked include:
Whether you need increasing cover depends on your specific circumstances and financial goals.
Indexation could be particularly beneficial if you’re worried about the long-term impact of inflation on your policy, especially if the cover is intended to help your loved ones meet expenses that are likely to rise, such as household bills, everyday living costs, or funeral costs.
For example, a 25 year policy taken out today may not provide the same level of financial support in 15 or 20 years time if inflation increases the cost of living, so indexation can help ensure that your policy continues to meet your needs.
On the other hand, if you only need to take out a policy to help cover fixed debts, like an interest-only mortgage, then you may consider other options, such as level term life insurance which provides a fixed cover amount.
Or, if you only need cover to help protect a repayment mortgage, then decreasing term life insurance could be more suitable as it provides budget-friendly cover for debts that are likely to reduce over time.
Indexation life insurance has various benefits as well as drawbacks to consider.
Here are some indexation life insurance pros and cons to help you decide if it’s the right option for you:
Pros of indexation | Cons of indexation |
Maximises the value of your life insurance by increasing your cover amount every 12 months to keep up with inflation | The monthly premium cost increases up to 15% each year for the duration of the policy (unless you choose to decline the increase) |
No need to provide further medical information when cover increases, unlike taking out an additional ‘top up’ policy which would require a whole new application and may have higher premiums | It may not be a budget friendly option. Level term and decreasing term life insurance policies are likely to be cheaper |
You can choose to accept or decline the yearly increase (can only decline up to three times in a row), giving you some control over your policy |
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To find the best indexation life insurance for you, it’s important to compare policies and quotes from a range of different providers.
Most life insurance providers offer indexed cover, including:
You can get no obligation quotes by going through a comparison site, a broker, or by contacting the insurers directly.
It’s also essential to double check the terms and conditions of a policy before buying to make sure that you’re happy with the percentage increase limits specified by the insurer.
Get in touch to speak to a friendly expert and get free, no obligation quotes today.
Please note, The Insurance Expert is owned by life insurance broker, Reassured, and the services offered will be carried out by Reassured.
Decreasing term life insurance is a policy that can’t be index linked as the cover amount decreases each year, the opposite of increasing cover.
If you’re looking for a cheaper policy that can help protect a repayment mortgage, then decreasing term life insurance could be suitable.
Over 50s life insurance is another policy that is not available with indexation.
Indexed life insurance could be worth the extra premium if it meets your needs and is affordable for you throughout the policy term.
One of the key benefits of this policy is that you don’t have to answer any new medical questions every year when cover increases.
This means any change to your health or lifestyle won’t affect the cost of your premium or your eligibility for an increase.
Whereas, applying for an additional policy to supplement your existing policy, or taking out a new policy altogether at some point in the future could mean paying a higher premium for the same cover.
This is because any new medical conditions and other risks would be considered to calculate the cost.
Yes, you can decline a proposed increase before it’s applied to your policy for that year.
Several months before each increase is due, the insurer will inform you of the new cover amount and the cost of your new premium, which you can choose to accept or decline.
However, with most insurers, declining more than three years in a row will cancel the indexation option and switch you to a level term policy.
This means your cover amount would stay the same for the remainder of the policy term.
