Let’s assume that you are considering purchasing an individual disability income insurance policy and are also considering several different riders to add to the policy. The number one thing to think about is inflation. For the past decade we have not had to deal with inflation like we are experiencing today.
Often referred to as a COLA rider (Cost of Living Adjustment) the Index Cost of Living rider is a must. As an example, a 30-year-old male that purchased an individual disability income policy with a COLA rider ten years ago, with a base monthly benefit of $5000, would realize nearly $11,000 a month today. This is the power of 3%, compounded.
A COLA rider can offset most or all of the effects of inflation. Most disability policies base the rate of benefit increase on the Consumer Price Index (CPI) up to a certain percentage. Often it is 3% but some insurers offer 6%. Each insurer has different rules when it comes to COLA riders, and it is important to discuss these provisions with your broker. If the CPI is less than 3% then the benefit increase will be less than 3%. If the CPI is higher than 3% the benefit increase stays at 3% per the policy terms.
Back to the 30-year-old male example: Say he recovers after 5 years of disability and returns to full-time work. Up to the point of recovery he was receiving nearly $11K a month. With most disability policies he will be given the option to continue coverage with no medical exam, the monthly benefit $11K if he likes for an additional premium… or leave it at the original $5000 a month for the same premium.
Many disability policies include increased residual (partial) disability benefits when a COLA rider is purchased at time of application.
As a nation we have been fortunate when it comes to inflation over the past decade, but those days have now passed. With soaring debt in the trillions of dollars it is now time to pay the piper. Protecting oneself against the effects of inflation is of utmost importance when it comes to disability insurance, and a COLA rider is a prudent purchase.