| Index
linking is a way of maintaining the actual purchasing power of the
cover level at the time the policy was taken out.
Over time the value of money decreases, caused by inflation:
£100,000 of goods now will cost £124,886.30 in 10 years
time.
Index linking increases the level of cover yearly to ensure
that the purchasing power of the final cover level is the same as
it was originally taken out. Life companies usually use the retail
price index as a yardstick for the percentage increase used on the
policy.
£100,000 cover would be £124,886.30 after ten years.
However this added benefit would also increase the premiums yearly,
at the same rate that the cover level increases e.g.
Premium year 1 = £10
Cover level year 1 = £100,000
RPI (Retail Price Index) 2.5%
Premium year 2 = £10.02
Cover level year 2 = £100,250
This added benefit varies in price between the insurance companies.
Links
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