What is Indexation in Life Insurance?
- By Willi Olsen
- Updated
Indexation in life insurance might sound technical, but it’s actually a simple concept once you break it down.
When you choose to add indexation to your life cover, it means the amount your policy pays out can automatically increase each year – usually in line with inflation. This helps your life insurance keep pace with the rising cost of living so your family’s financial protection doesn’t lose value over time.
In short, indexation helps ensure that the payout your loved ones receive remains meaningful—even years or decades from now.
By choosing indexation, you’re making a smart move to safeguard your family’s future, regardless of how much prices increase.
What is indexation in life insurance?
Indexation, or the inflation adjustment benefit, increases your life insurance cover each year to keep up with rising costs. Your premium also increases to reflect the higher payout. Each insurer adjusts the cover and premium differently, but the purpose is to maintain the value of your policy over time.
Indexation = Inflation Protection
At its core, indexation in life insurance is designed to protect the value of your policy from being eroded by inflation.
Think of it this way: $100,000 today won’t stretch as far in 10 or 20 years. That’s where indexation steps in — as inflation goes up, so does your cover.
This is where the Consumer Price Index (CPI) comes into play.
CPI is a widely used indicator published quarterly by Statistics New Zealand. It tracks how much the average price of everyday goods and services increases — things like food, transportation, education, healthcare, and clothing.
When the CPI rises, it signals that the cost of living has increased. If your policy includes indexation, your life insurance benefit amount rises in line with that CPI increase, or by a fixed percentage (usually around 5%), whichever is greater.
In simple terms, indexed cover = inflation-adjusted cover.
Why It Matters: Protecting Real Value Over Time
Without indexation, your payout may lose purchasing power year after year. For example:
- A $200,000 policy taken out today may only be worth the equivalent of ~$150,000 in 15 years, depending on inflation.
- But with indexation, that same policy automatically scales up, keeping the real value intact.
This is especially important for younger policyholders, those with long-term financial plans, or anyone who wants to make sure that their family’s future is truly protected—not just nominally covered.
Is Indexation Optional?
Yes, most life insurance providers give you the choice to include or decline indexation. You can usually opt out of annual increases, but if you do it too many times, the insurer may remove the option altogether.
And here’s a final tip: indexation works with both stepped and level premiums, so you can tailor your policy depending on your financial strategy.
Should I add indexation to my life insurance (increasing cover)?
Indexation increases your cover each year, but it also raises your premiums. Make sure the rising cost fits your future budget.
Review your policy to see how much premiums may increase annually. Some have caps on the yearly adjustments, while others don’t.
Deciding whether to include indexation depends on your long-term financial goals and ability to handle higher premiums over time.
Should I add indexation to my life insurance (increasing cover)?
Indexation is a built-in feature in many life insurance policies that automatically increases your cover amount each year. This increase usually follows a fixed percentage or adjusts in line with inflation, using measures like the Consumer Price Index (CPI) or Retail Price Index (RPI).
Let’s say you start with $100,000 in cover. With a 3% annual indexation rate, your cover would rise to $103,000 in the first year. Sounds good, right?
But here’s the catch: your premiums go up too — and often at a slightly higher rate than your cover.
Why? Because as your cover grows, so does the insurer’s risk. That extra cost gets passed along in your monthly payments.
Can you say no to indexation in life insurance?
Yes. Most policies give you the option to decline the increase if the new premium feels too steep. Just keep in mind that opting out several years in a row might cause the insurer to remove indexation from your policy entirely.
Why Indexation (CPI) matters
Over time, inflation erodes the value of money. Without indexation, the real value of your payout may shrink, especially if you plan to hold your policy for 10, 20, or 30 years.
Think of indexation as a way to future-proof your policy.
Find out how much cover you actually need
Over time, inflation erodes the value of money. Without indexation, the real value of your payout may shrink, especially if you plan to hold your policy for 10, 20, or 30 years.
Think of indexation as a way to future-proof your policy.
Not sure if indexation is right for you, or whether your current life insurance still fits your needs?
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Disclaimer: The information in this article is for general guidance only and does not replace personalised financial advice. While every effort has been made to ensure the content is accurate and relevant, insurance policies, healthcare benefits, provider offerings (including nib, Partners Life, and others), and regulatory settings may change over time. This article may not reflect your circumstances or the latest industry updates. We recommend you speak with a qualified and licensed financial adviser for advice tailored to your situation. LifeCovered is here to help – our advisers are fully licensed and experienced in providing personalised insurance and financial guidance.
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