Life Life Assurance Policies and Indexation

I met with a finanicial adviser today with a view to taking out a life assurance policy.

I was told that if I choose to have the policy indexed against inflation, the lump sum paid out when I die will rise at a rate of about 5% per year but that the premiums I will pay will rise a at a rate of about 8% per year. I queried the reason for the difference and I was told "that's just the way the policy works."

Is this difference typical of life assurance policies? Please comment.

It very much depends on the life assurance company. Caledonian Life & New Ireland index both premiums and cover at a fixed 5% per year. Others index cover at 5% but premiums at a higher rate. Although the premiums indexing at 5% tend to be a bit dearer at the start, over the course of a few years, such policies usually work out much cheaper. Ask your financial adviser to show you quotes that index the premium at 5% and the total cost after the full term, compared with the 8% indexation.

Liam D. Ferguson

Hi, thanks for your advice.

I have received two types of quotes from several brokers. As you point out, one type starts at a relativley low premium and increases at a relativley high rate and the other type is the oppposite. For example, non-smoker, benfeit of €125K, a 20-year-term and a convertible option (that means I can renew the policy at the end of the term without having to undergo a medical examination), I calculated that the total cost of the premiums was about €300 less with a low starting premium and a high rate of increase:
Insurer 1 Insurer 2
Rate of Increase of Premium 7.5% 5%
Monthly Premium in Year 1 €27.97 €37.37
Total Cost of Premiums €14,534 €14,828
Apologies if this table is poorly formatted. Any advice on how to create properly-formatted tables in these posts would be greatly appreciated.