What is Index-Linked Income Protection?
Income protection is an important type of insurance for people who are either self-employed or working in an environment where a long-term company sickness scheme is not in place.
Getting a basic level of income protection is easy enough and highly recommended if you (like most of the country) find that the government-driven Statutory Sick Pay scheme is simply not enough to cover your expenses if you were to fall ill for a long period of time.
But basic income protection is just the tip of the iceberg.
Index-linked insurance is a way of making sure that the insurance you took out all those years ago has the same effective value today.
Look at food as a good baseline. Whether it is bread, milk, chocolate or fine wine, the amount you get for £10 today is considerably different to the amount you would have enjoyed ten, fifteen or twenty years ago. It tends to get dismissed under the umbrella of inflation, but there are those who track these small changes and note the real-world difference in buying power between a pound today and the same in years gone by.
This process is called indexing and is shown mainly in two main indexes in the UK – the Retail Price Index (RPI) and the Consumer Price Index (CPI). There’s a subtle difference between the two in terms of what items they take into account – RPI includes energy costs and house value, where CPI includes retail prices and other goods.
With index-linked income protection insurance, you connect your policy with the CPI and ensure that your payments would have the same buying power today as they did when you first signed up for the policy.
The point of your income protection policy is to cover your outgoings if something happens that prevents you from being able to work.
If when you come to use it, it can barely scratch the surface of your expenses, then it’s pretty poor protection. That’s why index-linking comes in handy.
Looking back a few years, if you had taken out cover in 1990 for a protection of £1,000 per month, you would need £2,232.76 today in order to buy the same amount of goods and services as your £1,000 covered back then.
Yet, if you did still have that policy unchanged, you’d only receive the £1,000 per month.
Obviously, the benefit of index-linking in this way needs little more explanation, but what about the other side of it?
On paper, the only extra cost it takes to index-link your income protection is that your premiums will be similarly index-linked – so if you were paying £10 per month in 1990, now you’d be parting with £22.33.
That’s fine though because if you were measuring it in chocolate bars, it’s exactly the same number of chocolate bars now as it was then.
Unfortunately, some insurance companies like to take a little advantage when providing index-linked policies:
Rather than using the same figure to index-link your outgoing premiums as your payouts, they add a little to the premium calculation to take into account your increased age and other factors.
The changes to the index are calculated yearly, but for administrative ease, many insurers will update both premiums and payments only every few years.
Of course, these factors will be listed in the terms of your insurance documentation and can easily be caught if you take the time to read the policy in full before signing.
Index-linked life insurance is a similar adjustment that can (and usually should) be made to any standard life insurance policy. The results are similar, only the numbers involved can make the overall effect significantly more impressive.
Should I get it? Can I change my mind later?
The decision to attach index-linking to your income protection insurance should be a swift one – unless you genuinely see the premiums scaling to an unaffordable level, there is little doubt that you should choose to index-link. In fact, the main reason people shy away from taking this more comprehensive cover is because it is hard to understand when first introduced to it – and hopefully, this article has done its job and made the complicated subject simple!
Index-linking is especially important if you see yourself relaxing with the policy in place for many years. It is easy to forget about any insurance that you put in place years ago, and a decade or more may fly by without you ever taking the time to review your income protection. In these cases, it is good to know that you did the right thing in the first place and that it has grown with you.
Of course, if you improve your job or your career salary takes on a leap or two, you may want to return and re-evaluate your policy anyway, bringing it more in-line with the money you are earning now.
Most insurance companies will allow you to add index-linking to your premium and remove it at a later time if you no longer want the extra expense. Any prior linking will remain, and the policy total will be adjusted accordingly.
Depending on the insurer, you may be limited in the number of times you can turn on and off index linking – typically, a maximum of three alterations to your policy will be in place.
At Compare UK Quotes we work hard behind the scenes, evaluating providers and brokers to make sure that you get the best possible deals available on the internet. For all our insurance needs, which includes income protection, we are drawn to Quick Quote Life Ltd.
Quick Quote Life is a specialist insurance broker with years of experience in providing their clients with a huge range of life insurance products and related services. They are experts in the field of income protection and can help you with the pros and cons of index-linking as well as answering questions regarding why you should index-link your income protection.
As Quick Quote Life are an advisory service as well as a broker, they can offer you actual help when it comes to making choices on your life insurance - brokers that are not registered advisors are not allowed to give you any help regarding your decision-making process and must simply tell you the options available. This extra level of service makes them a top-quality company when dealing with financial security for you and your family.
For more advice regarding life insurance and all other personal finance products, check out our useful guides here at Compare UK Quotes – we’re always adding more every month!