Is The COLA Rider Important?
Is Inflation A Threat?
by Gary Fegan

One must consider the possibility of becoming disabled and the financial consequences a disability would bring. That is why one secures disability income protection. Now think of your age. A disability benefit that is issued today may allow you to maintain the standard of living that you are accustomed to, but what happens as time goes by, and you are still disabled? The answer is that the buying power of the disability benefit is eroding- or being reduced- by inflation.

The best way to guard against that eventuality is by adding a cost of living adjustment rider benefit to your disability policy when you secure the coverage. Most companies offer a 3% benefit, and some offer a 6%, while others tie it to the Consumer Price Index (CPI U), and allow it to fluctuate annually from 1%-6%, based on the annual fluctuations of the CPIU.

As a rule of thumb, the younger one is, the more important this feature. For example, if one is under age 45, it is almost imperative to have the Cost of Living Adjustment Rider. It is recommended for those between the ages of 45 and 55. It is not as necessary for those over age 55, as they are closer to retirement, and the effect of inflation is diminished by the lesser number of years to retirement.

Imagine if you are 40 years old and became disabled, and based on your income, you qualified for $5,000 per month of disability insurance benefit. This may be sufficient to meet your needs at first, but as inflation factors in as the years go by, your benefit provides less and less.

The following illustrates an example of two people. One added the cost of living rider, and one did not. They each started with a $5,000 monthly benefit and became disabled at age 40.

Monthly Benefit* at age	40	45	50	55	60	65
With 6% COLA	$5,000	$6,312	$8,447	$11,305	$15,128	$20,245
Without COLA	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000

As you can see, the difference is staggering. This is an area that you need to pay close attention to when securing your own disability insurance policy. Make sure you make the right decision for your needs.

* Comparison of potential monthly benefit with 6% Cost of Living Adjustment Rider. Assumes constant 6% increase in the CPI-U each year. Cost of living adjustments provided by this rider occur at the end of each 12 month period for continuous claims before age 65. See policy for details.