A sum assured that's well sized today will, ten years from now - with the same unchanged figure - protect only a fraction of today's value: inflation wears away the cover too. That's what indexation is for: the annual increase in premium and cover amount that lets your protection keep pace with prices. Accepting it isn't compulsory - but it's worth understanding what you lose if you decline it repeatedly.
- Indexation raises the amount, and with it the premium, at each anniversary - it's a tool for keeping pace with value, not a hidden premium increase.
- The rate is typically set according to an inflation-linked index, following rules fixed in the policy terms.
- If you decline repeatedly, the real value of the cover quietly melts away - over the years, a well-sized amount turns into cover that's too low to meet your real need. (We reserve the term 'under-insurance' for property insurance articles, where it means proportional indemnity.)
How does it work?
At each anniversary, the insurer offers to raise the amount and the premium based on the index fixed in the policy terms. If you accept, the real value of the cover is preserved; if you decline, the figure stays the same and the value falls. Important: indexation isn't a repricing due to your aging - the risk premium component rises with age anyway, and the product's premium calculation handles that separately; indexation is solely about keeping pace with value.
Accept or decline?
As a basic rule: accept it as long as the need for protection is also growing or holding steady - almost always true during the years with young children and a mortgage. Declining is reasonable once the need has genuinely fallen: the loan shrinks, the children become independent, reserves grow. So the real question isn't the premium, but the need - worth thinking through at each anniversary: reviewing the sum.
The quiet slide into under-insurance
The most common protection mistake isn't taking out a bad policy, but neglecting a good one: after ten skipped index years, the amount is nominally the same but is really worth much less. If you manage indexation deliberately - accepting it while it's needed, declining it when justified - your cover grows and changes together with your family: the trap of too little.
Practical tips
- Don't file the indexation letter away unread: it deserves two minutes of your time, once a year.
- At a major change in life circumstances (a child, a loan, a jump in income), don't leave the tracking to indexation alone - let's review the amount together: review.
- If the premium is straining your budget, let me know - the structure (term, riders, cover layers) can often be fine-tuned so that the essential protection is preserved.
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