When we think about inflation, we usually picture rising grocery bills, fuel prices, or interest rates. But there’s another area where inflation can quietly make a difference – your personal insurance.
If you took out cover a few years ago, the amount you insured yourself for may not go as far today as it did back then. And that’s something worth being aware of, especially when your policy is designed to protect your income, repay a mortgage, or support your family’s future.
Why does inflation affect insurance?
Inflation refers to the gradual increase in the cost of living over time. As everyday expenses go up, the amount of money it takes to maintain your lifestyle also rises. This means that a lump sum or regular payment that once felt like plenty may not stretch as far if you were to make a claim today.
For example, $100,000 of trauma cover or $500,000 of life insurance may have been appropriate five or ten years ago. But depending on how your needs have changed – and how prices have moved – that same amount might no longer offer the same level of financial security.
How do policies account for inflation?
Some insurance policies include a feature called indexation, which increases your cover each year in line with inflation (often measured using the Consumer Price Index, or CPI). This helps ensure the value of your insurance keeps up with rising costs.
Indexation is most commonly found with life insurance, trauma cover, and income protection policies. It typically increases your sum insured annually by a small percentage, which can gradually build over time. Premiums usually increase as well – since you’re insuring a higher amount – but this adjustment helps maintain the overall value of your cover.
Other policies, however, may not include indexation as standard. In those cases, your cover remains fixed unless you make changes yourself. Over time, that can lead to a gap between what you’re insured for and what you might actually need.
For a simple breakdown of how inflation works in a personal context, MoneyHub offers a helpful explainer.
Do you still need the same level of cover?
It’s not just inflation that might prompt a second look at your insurance. Changes in income, family needs, or financial goals can all affect the level of cover that makes sense for you today. In some cases, you may want to increase your cover – in others, you might find you no longer need as much.
What’s important is knowing how your current policy works and whether it’s still aligned with your needs.
If it’s been a while since you reviewed your cover – or you’re unsure whether indexation applies to your policy – we’re here to help. We can talk through what you’ve got in place, how it works, and whether any small adjustments could better support your future plans.
Insurance is about peace of mind. And with the right guidance, it’s easier to know that what you’ve set up will still work the way you expect it to – no matter what the future brings.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
