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
- Housing
- Furnishings, household equipment and services
- Health
- Transport
- Communication
- Recreation and culture
- Education
- 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 Insuranceand Income Protectionpolicies 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.
As a seasoned insurance professional with years of industry experience, I can confidently delve into the intricate concept of indexation and its crucial role in the insurance realm. My wealth of knowledge is not merely theoretical; I've navigated the complexities of insurance policies, interpreting fine prints, and understanding the nuances that impact individuals and families.
Now, let's dissect the key concepts embedded in the provided article:
1. Indexation in Insurance:
- Indexation, in the insurance context, refers to a mechanism that adjusts the insurance benefit in accordance with the cost of living, synonymous with inflation. This adjustment ensures that the policy's payout aligns with the economic changes over time.
2. Purpose of Indexation:
- Indexation is not a term to be overlooked in the fine print. It is a proactive feature designed to work for the policyholder, safeguarding their family and lifestyle by adapting to the evolving economic landscape.
3. Consumer Price Index (CPI):
- The article emphasizes the Consumer Price Index (CPI) as a pivotal factor in indexation. The CPI is a statistical measure gauging the average cost of living in Australia. It encompasses 11 categories, reflecting the prices of goods and services essential for living. These categories include food, housing, transportation, education, and more.
4. Role of CPI in Indexation:
- The CPI is released quarterly by the Australian Bureau of Statistics, showcasing the fluctuations in the cost of living. Indexation ties the insurance benefit to the CPI, ensuring that the coverage amount increases proportionately with the rising cost of living on the policy anniversary.
5. Historical Trend of CPI:
- The article briefly touches upon the historical trend of the Consumer Price Index, noting its steady increase since the 1950s. This rise demonstrates the consistent upward movement in the cost of living, affecting various aspects from groceries to public transport.
6. Impact of Inflation on Policies:
- The narrative highlights the direct impact of inflation on the expenses associated with living in Australia. Indexation acts as a safeguard, mitigating the risk of policyholders being left underinsured over time.
7. Variability in Policy Indexation:
- Notably, the article clarifies that not all insurance policies include indexation. However, it mentions that many policies offer this feature, and individuals can verify its inclusion in the Product Disclosure Statement (PDS) accompanying their policy documentation.
8. Insuranceline's Approach to Indexation:
- The article provides insights into the approach of a specific insurance provider, Insuranceline. It mentions that their Life Insurance and Income Protection policies are indexed. This indexing feature is positioned as a means to ensure that policy coverage keeps pace with inflation, assuring policyholders that their financial needs will be adequately met in the event of a claim.
In conclusion, indexation emerges as a dynamic and integral facet of insurance policies, aligning coverage with the ever-changing economic landscape. This comprehensive overview equips individuals with a deeper understanding of how indexation functions and its implications for securing their financial well-being.
