What Does the COLA Rider do?

A Cost of Living Adjustment (COLA) rider in an individual disability insurance policy helps your benefits keep pace with inflation during a claim. How much of an adjustment you receive and when it occurs depends on the rider you select. There are three COLA riders^1,2 available;

• 3% Compound Cost of Living Adjustment Rider
   
• 6% Maximum Cost of Living Adjustment Rider
   
• 4-Year Delayed Cost of Living Adjustment Rider

Of the three COLA Riders available, the 3% Compound, and 6% Maximum riders will adjust your benefits beginning on the first anniversary of the date your disability first began and every year you remain disabled while receiving benefits. The 4-Year delayed Cost of Living Adjustment rider works similarly, but adjustments do not begin until the fourth anniversary of the date of your disability. 

Once adjustments begin, they continue annually as long as your disability lasts – up to the end of the policy benefit period. Once recovered from a claim, prior increases to the monthly benefit (if at least $300) remain on the policy with no additional charge until the end of your benefit period.

Benefits of the COLA Rider

Each of the three Cost of Living Adjustment riders adjusts benefits in a different manner;

The 3% Compound Cost of Living Adjustment Rider adjusts benefit by a fixed 3% every year while on a claim.
 

Adjustments under the 6% Maximum rider are also based on the Consumer Price Index (CPI-U). Compounded increases will not be lower than 3% and not higher than 6%. In years where the Consumer Price Index is below 3%, the adjustment in benefits will be 3%. In years where the Consumer Price Index is above 6%, the adjustments will be 6%. This rider is attractive for those who either anticipate a higher future inflation rate or just want the additional inflation security.
 

Adjustments under the 4-year delayed Cost of Living Adjustment are also fixed at 3%. However, adjustments do not begin until the fourth anniversary of a disability. This is an attractive Cost of Living Adjustment rider for those that prefer the 3% Cost of Living Adjustment rider but willing to pay less for this feature at the sacrifice of the first adjustment occurring at the 4th anniversary of a claim instead of the first anniversary of a claim.

Compound vs Simple Increases

Compounded increases payout more than simple increases. All three of the above riders increase benefits on a compounded basis. With compounded increases, each year’s percentage of benefit increases will be applied to the original benefit amount plus any and all prior year’s increases. With a simple increase, the percentage of benefit increases apply only to the original benefit amount while ignoring any and all prior year’s increases.

COLA is more for the younger policy owners than the older clients. Younger policyholders are typically in situations where their financial responsibilities are expected to grow for the next 2 or 3 decades. Inflation has a larger impact on younger policyholders than people who have less time before they retire.

Individual disability insurance policy Forms 18ID, 18UD and 18GI underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly-owned stock subsidiary of The Guardian Life Insurance Company of America, New York, NY. Product provisions and availability may vary by state. In New York: These policies provide disability insurance only. They do not provide basic hospital, basic medical, or major medical insurance as defined by the New York State Insurance Department. For policy form 18ID, the expected benefit ratio is 50%. For policy forms 18UD, 18GI, 18UD-F, an 18GI-F, the expected benefit ratio is 60%. The expected benefit ratio is the portion of future premiums that the company expects to return as benefits when averaged over all people with these policy forms.

If you choose to have an optional rider on your policy your premium will increase. 

This optional rider does not necessarily protect against an increase in the cost of living.

This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.