INDEXATION: WHAT DOES IT MEAN?

 As complex as indexation might sound, it is a rather simple concept in the insurance industry. Today, we help you understand what exactly it is and how it can help you.

To put it briefly, indexation is a benefit payment that increases in proportion to the cost of living. Let's say the cost of living in a given year rises by 5%, your insurance benefit (with indexation applied) would also increase by 5% so that you, or the beneficiary on your policy, can maintain your purchasing power as the cost of living increases. 

Indexation on your policy will automatically increase the sum insured every year by either 5% or by the Consumer Price Index (CPI) - whichever is higher. The "index" being discussed usually referees to CPI - a group of statistics that measures the cost of living in Australia. The statistics measure the average price we pay across a wide variety of goods and services, including:

·         food

·         alcohol

·         clothing

·         housing

·         health

·         transport

·         insurance

·         education

When the average price of the goods and services included in these categories increases, the Consumer Price Index increases to reflect that. Policies with the CPI option will have their insured benefit increased at the same rate.

ARE ALL INSURANCE POLICIES INDEXED BY DEFAULT?

No, they are not. However, most insurers do provide the option of adding a CPI or Indexation benefit to your policy. This can be a great way of future-proofing your insurance benefit against the ever rising cost of living.

HOW DOES INDEXATION APPLY TO PREMIUMS?

Indexation applies to both, level and stepped premiums.
Level Premiums - Even though level premiums do not increase every year, with indexation, as your the sum insured increases, the cost of that added cover is also added to your premium. It is important to know that this additional increase in premium is based on your age at the time of increase and not at your age at the time of taking out your policy.
Stepped Premiums - The amount of your stepped premiums increases every year. With indexation benefit, there is an additional increase in the premium annually in line with the CPI increase.

 

WANT TO KNOW MORE?

If you would like to discuss the contents of this article, please call us at 02 8015 5507 or email us at info@angelicinsurance.com.au Please note that at Angelic Insurance, we can only provide you with general information, and do not consider your personal objectives and financial situation. You should consider whether the advice is suitable for you before making the final decision