Life Indexation: Is it EVER worth it?

[ronaldo]

Given the fact that a lot of policies increase the premium on an indexed life insurance policy by 8% and the benefit only by 5%, is indexation EVER worth it?

For a short term policy (less than 10 years), the impact of inflation will be relatively low anyway and, for a long-term policy, the premiums will go too far out of whack when compared to the sum insured after a while.

As an example, the quote I can get for an indexed 30-year policy with €120,000 level-term protection is €103.27.

The final years premium for the indexed policy would be €962.19 for €493,936 protection.

A non-indexed policy to provide that level of protection for the entire term of the policy would cost me €309.34 per year.

One may view this as excessive because there is a €206.07 premium difference annually. However, the premium for the indexed option would actually exceed the premium for the non-indexed option after only 13 years of the 30 year term.

Basically, in selecting the non-indexed option, you pay a larger premium during the initial years but, in doing so, make savings in the premiums in the later years - and significant savings at that. You also have the entire amount of the protection for the whole term of the policy as opposed to relying on inflation to increase it.

I know I'd rather pay €309.34 per year for the life of the policy than pay €103.27 for the first year increasing each year until it reaches €962.19 for the final year. Basically, the first number of years will be tough but, each year, the premium should be more manageable as inflation eats away at it's value and then, after 13 years, you're paying less than you would have with an indexed option anyway.

Doing this makes sense to me - although I'm not sure that a financial advisor would recommend it because a person should not need the €493,936 protection for the initial years of the policy and, therefore, I believe a policyholder may have a potential case for mis-selling if they were advised along these lines. However, just because you don't need it, doesn't mean that it's not nice to have - expecially if it's unlikely to cost you more in the long-term.

 

[leroy67]

And inflation also eats away at the sum assured !!! indexation can be 3% per annum on benefits and premiums with some providers which based on current inflation rates makes sense and also can be removed at anytime throughout the policy, 8% and 5% isn't a good option. If you are single with no dependents do you need the cover? if you have dependent's is €120k enough? 30 years is a long time and circumstances are bound to change at some stage during the term, indexation may preclude having to apply for a new plan should they.

 

[ronaldo]

I've changed my life cover to 35 years this year and the amount covered is almost 15% more than my mortgage, which has 25 years left to run.

It's also a level-term policy as opposed to decreasing term.

Whilst, for a single person with no dependents, a decreasing term policy for the term of the mortgage is sufficient, the above excessive cover was only added because that is what was required to bring me up to the minimum premium level.

Had I decreased the term and amount insured, it still would have cost me the same.

 

[ronaldo]

Regarding the providers where the rises in premiums and sum insured is the same, I guess you'd need to get a quote for indexed policies with those providers and then see what level of insurance the premiums offered by them would provide with the non-indexed providers.

I'm assuming the companies offering the policies where the premiums and sum insured rise by the same percentage will not be the cheapest for everyone.

If I'm going for a 20-year policy with €100,000 cover and limit myself to the better of the indexed options, I'll pay a certain premium. With 3% p/a rises, I'd end up with cover of €175,000 of the initial amount for the final year of the policy (and paying a premium of 175% of the initial premiums).

If, by not limiting myself to the companies that offer the better of the indexed policies, I am able to get, for example, €150,000 cover for the term of the policy for the same premium, I'd need to seriously consider which is the best option for me.

This is especially the case when you consider that, for most people, their required cover should decrease with age. If you are providing for a spouse to retirement, she'll not need as much towards the end of the policy as she'll be closer to retirement. The same could be said for providing for children until they reach working age.

Therefore, I'd argue that having higher cover at the start than what you actually need and for this to eventually be eroded by inflation could possibly be a better option for a lot of people.

 

[Sumatra]

Inflation proof the product yourself by purchasing more cover than you initially need at the outset.

 

[StevieC]

Agree with Sumatra, this method nearly always works out cheaper than buying an indexing policy. You know exactly from the outset what you will be paying long term and have the benefit of having higher cover in the early years in the unfortunate event of a claim in the early years.