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Pay as you go inflation linking on protection insurance

The UK-based insurer, Legal & General (L&G) has announced plans to introduce inflation-linking on a number of its protection products on a 'pay as you go' basis.

Plans that include an inflation-linking (indexation) option consist of life insurance, critical illness cover and income protection insurance.

What is inflation-linking

Including an indexation option allows the sum insured on the policy to rise each year in-line with inflation. This option therefore allows the real value of the sum insured to remain constant over time, thus preventing any erosion in cover by changes in the prices of goods and services.

Including the indexation options allows the benefit received from any policy payout to maintain the policyholders (or beneficiaries in the case of life insurance) standards of living over time.

Pay as you go option

Under the changes to their index-linked plans, Legal & General will not implement an initial indexation charge at the start of the policy but will recalculate the premium charged in an annual indexation review.

At the point of the annual indexation review L&G customers will have the option to accept or reject the proposed rise in sum assured and premium.

If the rise in cover is declined, for policies with guaranteed premiums the rate charged would remain unchanged and for plans with reviewable premiums the rate would only change based in the insurers updated assessment of risk.

L&G view this new pay as you go method of indexation as being more in-line with the Financial Services Authority's 'Treating Customers Fairly' principle for customers who reject index rises in the early years of the plan.

Reaction to advisers

Legal & General decided to make the change to their inflation linking procedure in reaction to feedback from financial and insurance advisers.

With consumers being extremely sensitive to price it has been increasingly difficult to promote inflation-linked policies that include an initial loading for the increased risk taken on by the insurer, even if a superior level of cover is provided.

Drewberry Mortgage Insurance welcomes this move by L&G as it increases the flexibility of their protection offering by allowing clients to alter their sum insured each year to counter the impact of inflation without having to pay for that option at the outset of the policy.

The new indexation option will be available on L&G's Multi Protection menu, which consists of term life insurance, critical illness cover and family and individual income protection plans.

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