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. The amount of adjustment you receive and when it occurs depend on the rider you select. There are three COLA riders available:^1,2.

• 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 differently.

The 3% Compound Cost of Living Adjustment Rider adjusts the 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 be between 3% and 6%. In years when the Consumer Price Index is below 3%, the benefit adjustment will be 3%. In years where the Consumer Price Index is above 6%, the adjustments will be 6%. This rider is attractive to those who anticipate a higher future inflation rate or simply want additional inflation protection.
 

Adjustments under the 4-year-delayed Cost of Living Adjustment are also set 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 who prefer the 3% Cost of Living Adjustment rider but are 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 yield higher payouts 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 years’ increases. With a simple increase, the percentage of benefit increase applies only to the original benefit amount, while ignoring any and all prior years’ 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 greater impact on younger policyholders than on those with 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 only disability insurance. 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, and 18GI-F, the expected benefit ratio is 60%. The expected benefit ratio is the portion of future premiums the company expects to return as benefits, averaged across all people with these policy forms.

If you choose an optional rider for 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.