Increasing life insurance: compare the rise in cover with the rise in premiums

Increasing life insurance can raise the insured amount over time, often using an inflation-related formula. The premium can also increase, and its formula may differ from the one used for the cover.

Read the annual notice as two linked changes: what protection you would have and what you would pay. Then consider whether the updated cover still fits the household's needs and budget.

Identify the policy's increase formula

The policy schedule and terms should say whether cover increases by a fixed percentage, a price index or another basis. Check any minimum, maximum and timing rule.

For a specific example, Legal & General's Life Insurance terms describe increasing cover linked to RPI, with a separate premium increase based on 1.5 times the relevant RPI change, subject to limits. This describes that document's arrangement, not every increasing policy.

Do not assume that a 4% increase in the sum insured necessarily means a 4% increase in the premium. Ask the insurer to identify the relevant clause if the annual notice does not make the relationship clear.

Translate one annual change into pounds

Suppose an invented policy currently provides £200,000 of cover for £30 a month. Assume its applicable annual formulas produce a 4% cover increase and a 6% premium increase, with no other adjustment.

The new cover is £208,000. The monthly premium becomes £31.80, or £381.60 over twelve months. Compared with the original £360 annual premium, the increase is £21.60 a year.

This is an arithmetic illustration, not a quotation or a prediction of next year's inflation. Comparing the pounds alongside the percentages makes the immediate budget effect visible without deciding whether the change is suitable.

Look beyond the first year's increase

Repeated percentage increases compound. Using the same purely hypothetical 4% cover and 6% premium increases every year for ten years, £200,000 of cover becomes approximately £296,049 and a £30 monthly premium becomes about £53.73.

That does not forecast an actual policy. Inflation and contractual increases can vary, and policy conditions may impose limits. It demonstrates why affordability should be considered over time rather than only at the first anniversary.

Ask for illustrations showing how the product behaves under different assumed increases. Keep the assumptions prominent so an illustration is not mistaken for the insurer's guaranteed future premium schedule.

Compare indexation with the needs it is meant to protect

An inflation index measures a broad change in prices. Your household's needs can change differently. A mortgage may be reducing while childcare, rent or support for a dependant increases.

List what the cover is intended to fund and update those amounts. If the original need has materially changed, simply accepting every annual increase may not answer the underlying question. Equally, a stable nominal sum can lose purchasing power as prices rise.

For example, a cost currently estimated at £50,000 would become about £60,833 after five years of assumed 4% annual increases. That is a planning scenario, not a claim about the future cost of a particular service or the right amount of life cover.

Check the effect of declining an increase

Policies can allow an annual increase to be declined, but repeated refusals may affect future options. Confirm the response deadline, how to submit the decision and whether both policyholders must agree for joint cover.

The Legal & General terms cited above include conditions under which the increasing option is removed after consecutive declines. Your own policy version and notice must determine the consequence; do not rely on a general assumption that you can pause increases indefinitely and restart later.

Ask whether restarting or increasing cover outside the existing option would require fresh underwriting. A choice about this year's premium can therefore also affect future flexibility.

Distinguish annual indexation from other policy changes

An inflation-related increase is different from applying for more cover after a new mortgage, marriage or child. It is also different from a reviewable premium being recalculated under another policy mechanism.

Legal & General's policy-change guidance illustrates that life-event options have their own eligibility and conditions. Check which route is relevant rather than assuming all increases are available on identical terms.

If replacing a policy is being considered, compare exclusions, remaining term and underwriting as well as the starting premium. Do not cancel existing cover on the strength of an unaccepted quotation.

Keep the anniversary decision in the household record

Save the notice, updated insured amount, premium and any response. Note why the decision was made, particularly if it depends on another policy, workplace benefit or planned reduction in debt.

For a wider review, these guides cover income protection advice, documents for an adviser meeting and what happens at the first meeting. A useful discussion starts with the purpose of the cover and its future affordability, as well as the annual percentage change.