Indexation refers to a benefit that increases in proportion to the cost of living, also known as inflation.
If you’re looking at taking out insurance, it pays to know what you’re getting and how it will affect your future. So, we’re looking at one of the most frequently asked questions: what is indexation and how does it affect my insurance?
Indexation doesn't need to be a word that you gloss over in the fine print when looking at insurance. Really it is just another way that your insurance policy works for you to make sure you can keep your family and your lifestyle secure. So, let’s look at indexation and what it means for you and your insurance.
What is Indexation?
Indexation is an economic term that means your insurance benefit is adjusted to keep up to date with inflation. Indexation is a factor that changes how much your insurance pays out if you need to make a claim in the future. Put simply, indexation accounts for changes in the economy and inflation, meaning that if your cost of living goes up then your policy payment goes up with it.
Four times a year the Australian Bureau of Statistics releases their Consumer Price Index (CPI), which is a group of statistics that looks at how much it costs every year to buy groceries, go to the cinema, put petrol in your car and more.
Having an indexed insurance policy means that the amount you're insured for changes with the CPI. That helps to future-proof your policy; each year as the cost of living changes, your cover amount increases by a similar percentage on the policy anniversary.
So, if after 10 years you need to make a claim, your payout will have been adjusted to help ensure you aren't left short so you can cover your expenses and look after your family.
What is the Consumer Price Index (CPI)?
The Consumer Price Index measures the average cost of living in Australia. This is where the Australian Bureau of Statistics looks at the average prices that we all pay for goods and services across Australia. It looks at the cost of 11 categories that make up the bulk of living expenses in major cities:
- Food and non-alcoholic beverages
- Alcohol and tobacco
- Clothing and footwear
- Furnishings, household equipment and services
- Recreation and culture
- Insurance and financial services.
If you imagine that each year you made one purchase in each of these categories, you might see over time that the total cost for that year went up or down. This is the cost of inflation, and it directly affects how much it costs to live in Australia.
The Consumer Price Index has been steadily rising each year since the 1950s, showing how the cost of living in Australia and everything from buying groceries to public transport has steadily increased.
Remember the last time someone said “back in my day you could get a meat pie for $1”? That's basically the Consumer Price Index showing you how prices have changed with the effect of inflation.
Are all policies indexed?
The short answer is no, not all insurance policies are indexed, however many offer this feature. You can always check whether indexation is included or not—this information will usually be in the PDS.
Insuranceline Life Insurance and Income Protection policies are indexed, which is intended to help ensure your cover keeps pace with inflation so you’ll have enough money should you need to make a claim. If you don’t want your policy indexed, then you can simply let us know.
Talk to one of our Insurance Specialists today on 13 77 87 about how Life Insurance can work for you.