With inflation so high, is your life insurance and protection still enough?

Over the last year, inflation has never been far from the headlines. Prices have been rising at their fastest rate in 40 years, with the Office for National Statistics (ONS) reporting that food prices alone rose by 17.4% in the year to June 2023.

That means a £50 basket of groceries a year ago would cost £58.70 now.

Inflation effectively reduces the spending power of your money in real terms. As prices rise, your money doesn’t go as far, and you will have noticed this at the petrol pump or in the supermarket.

However, inflation can have a negative impact in other ways – particularly on the value of your life insurance, Critical Illness cover, and other protection policies.

Read on to find out more about why you should review your cover after two years of high inflation, and how you can tackle the problem.

High inflation means your existing cover might not be enough for your needs

A new report published by consumer champion Which? has urged people to check the value of their life insurance and other protection policies to ensure it remains sufficient.

As costs have risen so sharply in the last couple of years, the lump sum that your insurer will pay to you or your family in the event of your death or serious illness might not stretch far enough to cover all your main expenses.  

Which? reports that £100,000 worth of cover taken out 10 years ago is now worth a third of its original value in today's money, or less than half its original value compared to 20 years ago.

Here’s an example using the Bank of England’s inflation calculator.

You took out a £100,000 level term life insurance policy in 2008. You chose this level of cover as you wanted to provide three years’ worth of expenses to enable your family to maintain their standard of living.

In June 2023, thanks to inflation, those same £100,000 of expenses would now cost £155,160.

So, if you were to die now, your payout would not be enough to meet the aims you had when you took out your cover. 

It’s important to review your cover now

If you took out your life insurance some time ago, now is the time to review whether the lump sum payout will still be enough to support your family's needs. 

In addition, if you took out Critical Illness protection a few years ago, any payout you may receive may also not be sufficient – especially as your income and expenses will likely have risen sharply during that period.

For example, a common reason to choose Critical Illness cover is to pay for modifications to your home in the event of a serious illness or disability. In recent years, the cost of those improvements will have likely increased considerably. 

To work out how much cover you need, you should first consider your debts, including your mortgage, loans, and credit cards.

Then, work out how much you and your family will need to cover your other expenses such as utility bills, food, and other regular commitments. This might include school or university tuition fees, holidays, and any additional childcare you might require.

Depending on your situation, it might be beneficial to have more than one policy. For example, you might choose decreasing life cover to help your loved ones pay off your mortgage, a level term policy to leave a lump sum for them to cope with other costs, and Critical Illness cover to provide support if you were diagnosed with a serious illness.

If you’re not sure exactly how much cover you need, our mortgage life insurance calculator can help. This useful tool can let you work out what level of cover is suitable for your circumstances, and you can then get a life insurance quote for that amount.

Indexation can help your cover to keep pace with the rising cost of living

When you take out protection such as life insurance or Critical Illness cover, you can choose to add something called an “indexation” option (note that his option is not normally available with decreasing life insurance).

When you choose indexation, the amount of cover that you benefit from will rise each year. This is normally linked to either Retail Prices Index (RPI) or Consumer Prices Index (CPI) inflation, while other insurers offer a set increase each year. There’s normally a maximum amount that your cover can rise by.

A life insurance policy offering £100,000 worth of cover that increases by 5% annually, for example, will rise to £155,132 after 10 years and £252,695 after 20 years.

You should bear in mind that your monthly premium will also likely increase each year to reflect the additional amount of cover. However, this is usually also only by a few pounds each month so it’s normally an affordable choice.

Your insurer will write to you each year to tell you:

• How much your cover will increase by
• What your new monthly premium will be.

If you later decide that you want to cancel the annual increase, most insurers will let you do this. You may also have the choice of refusing an annual increase – although you can normally only do this once.

It’s important to shop around for life insurance and other protection when prices are rising

As you will have noticed over the last couple of years, high inflation makes everything cost more. That includes fuel, food, energy – and the cost of life and other insurance.

As a result, the price of cover is likely to have risen slightly in recent years.

While higher interest rates mean many insurers are earning more from their investments – and so can maintain the price of cover – others may have raised the cost of premiums to reflect their own rising costs.

So, as prices rise, it’s never been more important to shop around for cover. Comparing the cost of protection from a range of insurers can help you to keep your costs to a minimum – and we’re ideally placed to help you do this.

We work with dozens of the country’s leading insurers. So, when you get a life insurance quote online, we’ll scour the market for you and provide you with a comparison of the costs from well-known names including Aviva, Legal & General, and Scottish Widows.

At a glance, you can compare the premiums from the UK’s leading insurers, enabling you to make an informed decision. It also helps you to ensure that you don’t pay more than you need to for the cover you want – perfect during a cost of living squeeze.

Remember also that, once your life insurance or Critical Illness cover is approved, your premiums will normally remain the same for the lifetime of your policy (unless you choose an “indexation” option as mentioned above).

This gives you the peace of mind that you won’t face significant hikes in the cost of your cover in years to come.

Get in touch

As life insurance experts, we can help you to find the protection you need. Our online quote system is easy to use, and you can compare the cost of cover in just a couple of minutes.

We’re also here to answer any questions you may have, such as how indexation can help you to ensure you maintain the level of cover you need as prices rise.

Get a life insurance quote now or speak to one of our experts if you have any questions.