Automatic Cost of Living Adjustment

Definition - What does Automatic Cost of Living Adjustment mean?

Automatic cost of living adjustments (COLA) pertain to automatic changes in salaries in correspondence with a change in inflation. In the context of insurance, automatic COLA is a disability insurance rider that allows for an increase of the benefits paid out to a disabled person in response to a decrease in the purchasing power of money over time.

Insuranceopedia explains Automatic Cost of Living Adjustment

Because inflation can make the same amount of money worth less than before, COLA is applied to wages, salaries, rent, and even pensions. For instance, many government pensions have fixed and automatic COLA every year. One prime example is Social Security.

As for disability insurance, an automatic cost of living adjustments rider comes into play if the insured's disability lasts for at least a year and ensures benefits payments are adjusted accordingly to the changes in the value of money at any given time. The adjustment is generally calculated based on some index, such as the consumer price index, to help benefits keep up with inflation.

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