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CPI – “Cost Plus Insurance”? “Can I Pay in Instalments”?

You might wonder what some standard economic theory has to do with the cost of your insurance policies. And, fair enough, you may not. When you see your policy prices increase for “no reason” you may become a little more interested! It’s OK – CPI, the Consumer Price Index, for that is the very devil in the detail, means the value of your policy increases also. Please explain? Sure. Here we go!

CPI – by definition. What is it?

The official line, from the Stats Department, is that the “The Consumers Price Index (CPI) measures the rate of price change of goods and services purchased by New Zealand households.” So, inflation, in essence.

In insurance terms, its continual ascendance is one of the reasons your policy will increase in price on a daily basis. Just like everything else does. You know when people start saying that a loaf of bread used to cost tuppence “and look at it now?!” They‘re kinda right.

It’s usually only increasing at a rate of 1.5-2% per year. But CPI is always on the up.

CPI – by implication

What does that mean for your insurance policies? Numerically speaking?

  • As explained, CPI may only increase at a rate of 1.5-2% a year. However, that increases your sum-insured by that amount.
    • If you have a $500,000 life policy, the impact of an increase in CPI of 1.5% will see that policy valued at $546,772 by year 5. That’s a 9% increase in cover, to you.
    • BUT you are going to pay for that increase in cover; your premiums are also impacted by CPI.
    • (And a quick FYI, being life insurance, the premium costs increase as you age. That’s life. Insurance 😊)
 
CPI – a rationalisation

CPI as a concept, makes sense. We know that the value of money goes down over time; your purchasing power diminishes. Really? Really. What did that loaf of bread, or a Big Mac, or a packet of Mallow Puffs cost you 10 years ago, versus today? Exactly. So it makes sense for insurance providers to keep your policy moving on a par with inflation. Part of the thinking for the insurance providers is to make sure that your sum insured keeps pace in ‘real terms’, that the ‘true’ value of your policy remains the same over time.

CPI – can I hide?!

While most people are aware of CPI not all are aware of the implications it has on your insurance policies. And some get a shock when they see the extent of the increase on their policy costings. As always, there is a way to mitigate this. You can choose a ‘level’ policy – this is a way of locking in your premium for a specified time, which provides you with certainty going forward.

That said, many of our clients choose the “CPI Increase” option, the argument being that it “keeps it real” over the long term.

As always, the choice is yours; as always, we’re here to help guide you through that choice.

Dominic Bish

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