What benefit does indexation provide in life assurance policies?

Indexation in life assurance policies refers to a mechanism that automatically adjusts the sum assured or coverage amount in line with inflation. This feature is designed to ensure that the policy’s benefit amount retains its purchasing power over time.

As inflation rises, the cost of living increases, and the real value of money diminishes. Without indexation, the payout amount that a policyholder designated at the start could become inadequate for their beneficiaries in the future. By incorporating indexation, the coverage is increased periodically (usually annually) to reflect the rise in consumer prices, ensuring that the insurance payout remains relevant and sufficient in the context of the current economic environment.

The other choices relate to features that do not specifically address the mechanism of maintaining the coverage value against inflation. Reducing premiums or conversion options pertains to policy flexibility and cost but does not ensure the preservation of value, while tax implications for beneficiaries focus on the financial benefits of the payout rather than the adjustment of the coverage amount itself.