Life Insurance Premiums increasing by more than Sum Insured due to Inflation?

dothenumbersaddup

Hello, All the life insurance options I am looking at offer to increase the amount covered by inflation, but increase the premium by 1.5 x inflation each year - so the policy gets progressively more expensive - wondered if anyone knew of any better options?  Thankyou

HappyHarry

You would expect the premiums to increase at a higher rate than the benefit as you will be getting older and potentially less healthier each year.

This means that each increase in benefit should be more expensive to cover.

Weighty1

There used to be a variety of ways that premiums would increase on inflation linked cover but, as far as I'm aware, every company except VitalityLife use the 'rate of RPI x1.5' calculation these days.  VitalityLife used to increase the premium by inflation plus an additional fixed percentage, depending on the rate of inflation.  I'm not sure if this is still the case but in relatively low inflation times it was typically more punitive than the former calculation.

As Harry says, people generally get less healthy as they age so it's only fair that the premium increases at a higher percentage than the cover increases.

dothenumbersaddup

Thank you both.  Looks like a larger level policy to take account of some inflation would be better value.

Weighty1

dothenumbersaddup said:

Thank you both.  Looks like a larger level policy to take account of some inflation would be better value.

It depends on the purpose of the policy.  Does it matter if it's value is eroded by inflation?

For example, I have clients who'll want to arrange a lump sum policy which provides family protection to help raise children through to financial independence.  If they need £240,000 to cover the cost of raising the kids over 20-years (£240,000 / 20 / 12(months) = £1,000/month) does it matter if it's not linked to inflation?  In my viewpoint, NO, because as the children near financial independence the money can be spread over a shorter timeframe so th money is protectd from the eroding effects of inflation anyway (£240,000 / 10 / 12(months) = £2,000/month if death occured after 10-years.