Level cover shrinks every year that prices rise

Comparisons of index-linked cover usually pick a winner. This one picks the circumstances, which is more useful.

Three shapes of term cover

Level term pays a fixed sum throughout, decreasing term reduces the sum over the period, and increasing or indexed term raises it. Each matches a different underlying need, and choosing by price alone selects decreasing cover by default. Decreasing cover is cheapest because the insurer's exposure falls each year.

That makes it correct for a repayment mortgage and wrong for replacing a household income.

What inflation does to a fixed sum

A sum assured chosen to replace several years of income loses purchasing power steadily across a long term. Over the decades typical of family protection, the erosion is substantial even at modest inflation rates.

The policy still pays exactly what it promised, which is the point: the contract has not failed, the plan has. This is one of the quietest ways long-term protection becomes inadequate without anyone noticing.

How indexation works

Indexed policies increase the sum assured annually by a stated measure or a fixed percentage, with the premium rising correspondingly. The increase usually happens without further underwriting, which is its most valuable feature. Most policies allow you to decline an increase, and declining several may forfeit the option permanently.

For most people, that forfeiture clause is worth locating, because it is easy to decline increases in a tight year and lose the facility.

Guaranteed insurability options

Many policies allow the sum assured to be raised without medical evidence on specified life events such as marriage, a birth or a mortgage increase. These options are usually time-limited, requiring exercise within a short window after the event. They are valuable precisely because they preserve access to cover regardless of health changes.

Very few policyholders remember they exist at the moment they qualify.

Reviewing the amount

The natural review points are a new child, a house move, a change in income and a change in who depends on you. The calculation is what would actually need replacing, in today's money, at today's costs. Reviewing every few years is enough, and reviewing never is the common practice.

A note in a calendar is the entire mechanism.

The premium consequence

Indexed cover costs more each year by design, and the increases compound over a long term. That is a real budgeting commitment and should be weighed against simply buying a larger level sum at outset. Which approach suits a household depends on income trajectory and on what the cover is for.

Because that is a personal financial judgement, it belongs with a regulated adviser rather than a general rule.

Side by side

The takeaway

A fixed sum is a shrinking sum. Decide whether the need it covers shrinks too.

Pick the one that costs you least, and let the rest wait.