Cost-of-Living Adjustment

What Does Cost-of-Living Adjustment Mean?

A cost-of-living adjustment (COLA) is a rider added to a disability insurance policy that adjusts the benefits the insured would receive if they file a disability claim and the disability lasts for more than a year. Based on the terms of the rider, it increases the monthly benefit annually by a specified percentage, typically linked to the consumer price index. Because the rider only kicks in once a claim has been open for at least 12 months, it does nothing for short-term disabilities and is meant for people who expect a long recovery or a permanent condition. Anyone shopping for a disability insurance policy should ask the agent how the COLA percentage is calculated and whether there is a cap on annual increases.

This rider is also referred to as a cost-of-living allowance or a cost-of-living rider.

Insuranceopedia Explains Cost-of-Living Adjustment

The purpose of a COLA rider is to ensure that disability payments keep pace with inflation. However, it is one of the most expensive riders to add to a disability insurance policy. It may be more beneficial for younger policyholders, as they have more working years ahead, allowing them to collect benefits over a longer period and benefit from compounded COLA increases. Adding a COLA rider can raise the premium by 25% or more, so it makes sense to compare the cost of coverage with and without the rider before deciding.

COLA also applies to Social Security (SS) and retirement benefits.