Money loses its value over time. A loaf of bread costing 10p to buy in 1971 will cost you much more today. An indexation option on your policy means your cover keeps track of inflation, and doesn’t lose its buying power.
Index-linking your policy increases the amount of cover you’re buying in line with inflation each year. This allows your cover to keep up with the cost of living when it’s needed to pay out. That’s the good news; the downside is that the amount you pay for index-linked cover goes up with inflation too. Usually the price is adjusted annually.
People often underestimate the power of inflation, but over time the effects are dramatic. A figure of 4% per year doesn’t sound too bad, but over the 30 years of a policy, it would reduce the value of the pay-out by two thirds! Many types of policy are index-linked but some aren’t, and for the types of products where index-linking is available, you might want to choose this as an option.
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