Is index linking worth it ?

Venomspread3r

Hi guys just a quick one.

I've had a few quotes for my Income protection & Critical illness cover and I've the option to index link the policy.

So I'm under the assumption that this premium will rise every year ? 

I just wanted people's thoughts on why or why you wouldn't want index linked insurance?

Many thanks 

Mark_d

Index linking basically means that the payout will rise with inflation.  So whilst £1000 per month may be adequate to live on for now, in 5 years time you'd need a bigger payout to keep you going.

Not sure whether the premium will increase every year but it could - depending on your policy.

When I had income replacement my policy had a flat payout of £1500 per month.  I opted not to go for index linking because that would cost more and I felt it would not be necessary for me.

DullGreyGuy

Venomspread3r said:

Hi guys just a quick one.

I've had a few quotes for my Income protection & Critical illness cover and I've the option to index link the policy.

So I'm under the assumption that this premium will rise every year ? 

I just wanted people's thoughts on why or why you wouldn't want index linked insurance?

Many thanks 

Ultimately it depends on the exact nature of the product but certainly our PHI (income protection) is indexed linked so both the premiums and the payout increases with RPI each year. When we took it out it was for a 35 year period so had it not been indexed had I gotten too ill to work in my mid 50s I'd in all probability be getting less than half the money in spending power.

CI isn't really a product that I like and I dont hold it myself but it somewhat depends on what you want the lump sum for given your income will be protected by the PHI? If its to pay off a mortgage or such then most wouldn't index it but instead would have decreasing cover which will go down roughly inline with the repayment of the mortgage

Exodi

For most people it comes down to cost, I can't imagine many people "wouldn't want index linked insurance" as you frame it.

I think something like Income Protection or Critical Illness cover is something you'd generally want index linked.

For example, if you got insurance paying £2,000 p/m (not indexed linked) to cover your bills 5 years ago, inflation over the last 5 years now puts those bills at around £2,500 - which means should you need to claim you'd now be £500 short. You can imagine the issue if you extend this over decades.

Ultimately you get what you pay for.

Venomspread3r

Thanks for the feedback guys very much appreciated.
It seems a very marmite subject -ive spoken to a few work colleagues & they seem to follow the path of "you are 40 you've always been healthy - you look after yourself etc - I wouldn't be looking at income insurance especially when you get 6 months full pay then 6 months half pay" (I work in the public sector) and to a point I see what they are saying ..but the WHAT IF? is lingering in my head. 

Exodi

Venomspread3r said:

Thanks for the feedback guys very much appreciated.
It seems a very marmite subject -ive spoken to a few work colleagues & they seem to follow the path of "you are 40 you've always been healthy - you look after yourself etc - I wouldn't be looking at income insurance especially when you get 6 months full pay then 6 months half pay" (I work in the public sector) and to a point I see what they are saying ..but the WHAT IF? is lingering in my head. 

Yes that's a different question entirely. Also depends on other factors - e.g. one might be less worried about income protection if they also had years worth of expenses in savings/investments to fall back on if needed.

But the decision is largely individual and there's no right answer (well I guess technically there is a right answer when you're in a nursing home and you can look back in hindsight and go 'darn, I didn't need that insurance after all, what a waste of money' or 'christ, can you imagine how different our life would have been if I didn't take out that insurance before I got ill?').

Venomspread3r

Yes I hear " an emergency Fund will do the same job" for me to cover a years worth of money would take a while - and what if something happens whilst I was building said pot - I guess this is where the it makes you think how long should you budget for. 

Im lucky in the sense I get 6 months full pay 6 months ½ pay so possibly 2 year protection could well bring the premiums down that way I could put some money away at the same time. 

It's tough I know I want to do this but I'm not sure for how long and it's difficult because you say is 2 years enough well no if you're putting it up against a 25 year term but if you are doing a longer term you'd put less into the emergency fund as your insurance becomes your emergency fund.

I'm going round in circles 🤦🏻‍♂️

Aretnap

Venomspread3r said:

Thanks for the feedback guys very much appreciated.
It seems a very marmite subject -ive spoken to a few work colleagues & they seem to follow the path of "you are 40 you've always been healthy - you look after yourself etc - I wouldn't be looking at income insurance especially when you get 6 months full pay then 6 months half pay" (I work in the public sector) and to a point I see what they are saying ..but the WHAT IF? is lingering in my head. 

Most people are daft.

(1) Everybody is healthy until they're not
(2) They vastly overrate the extent to which they are in control of their own health. Yes you don't smoke and you go to the gym a couple of times a week... that's great but it doesn't mean you're never going to get ill. 
(3) They think of ill health in terms of a bout of flu or at worst a broken leg, and don't consider that people can be unable to work for years or even decades due to ill health
(4) So yes six months full pay and six months half pay is good as far as sick pay goes. But if you got long term ill tomorrow, how would you pay the bills for the other 26 years until you reached state pension age? 
(5) 40 is about the time of your life when the risk of coming down with a long term serious illness starts to go from "not likely" to "hopefully not but maybe...".
(6) etc etc

Unless you can count on a large inheritance or are lucky enough to win the lottery, your lifetime earning potential is the most valuable thing that you will ever own - vastly more valuable than your car or even your house. And yet many people are more willing to insure their mobile phones than their income.

Venomspread3r

@Aretnap I had to chuckle to myself at your comment about phone insurance it's insane and you are 100% right here I am thinking hmm but 23 years is more expensive than 2 year cover (of course it would be lol) EVEN my partner thought lifetime cover was too expensive therefore planting those seeds of doubt in your head.

But I think for me I won't be able to shake the "BUT WHAT IF" from my head.

Aretnap

Venomspread3r said:

 I am thinking hmm but 23 years is more expensive than 2 year cover (of course it would be lol)

Of course it is - and not just because it will potentially pay out for longer. Short term policies also tend to be annual renewable policies - so they only have to factor in the risk that you as a healthy 40 year old will get sick in the next year. Next year if they think nthe risk has changed they can increase your premium, or refuse to cover you altogether. So in 5 years time if you got diabetes, or early stage MS, something that doesn't stop you working now, but might in the future, you could suddenly find yourself without cover, or paying a much, much higher premium fro cover.

WHereas a lifetime policy is just that - the premium is fixed for he next 23 years, it won't go up as you age, if you get diabetes or MS you don't have to tell the insurer until you actually need to make a claim.

(The exception to the fixed premium is if you choose an index linked policy - in which case your premium goes up by a pre-defined amount, inflation, or inflation and a bit, but still doesn't go up because you're getting older or because you're less healthy than you were).

If you have a good sick pay policy, some savings and a partner who works then a short term policy is probably not much use to you. If you were off work for a year or two could you get by with a combination of sick pay, your partner's income, economising, dipping into savings and/or borrowing money? If so you can probably self-insure for that sort of medium-term sickness. It's what happens after the savings run out that's the problem - and once you've been off work for a couple of years your chances of ever going back to work start to take a nosedive.

So instead the best idea might be to look at a long term policy with a long deferral period. If you pick one that doesn't start to pay out for the first year, or even two years, of sickness that will reduce the premium significantly. You could use sick-pay and savings to self-insure for medium-term illness, but know that you are covered for the "what-if" scenario of genuinely long-term illness.

DullGreyGuy

Venomspread3r said:

Aretnap I had to chuckle to myself at your comment about phone insurance it's insane and you are 100% right here I am thinking hmm but 23 years is more expensive than 2 year cover (of course it would be lol) EVEN my partner thought lifetime cover was too expensive therefore planting those seeds of doubt in your head.

But I think for me I won't be able to shake the "BUT WHAT IF" from my head.

The base of insurance is risk management... you exchange the risk of a large loss for the guaranteed small loss (the premiums). Certainly there are some classes where the premium to maximum payout ratios feel poor value (eg mobile phone insurance, warranties etc), there's a variety of reasons for this, one critical one is the frequency of payouts.

You could have an accident tomorrow or fall ill and never be well enough to work again. Sure 12 month sick pay is good but you're 40 so what are you going to do about the other 24 years + before you were intending to retire? Sure most dont make such claims, same as most houses dont burn to the ground, but its because it could happen and we dont like the financial repercussions that we buy insurance