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Disability Insurance > Articles > Disability Insurance 101 > The Cost of Living Adjustment Rider (COLA)

The Cost of Living Adjustment Rider (COLA)

How much does it increase benefits?


A Cost of Living adjustment (COLA) rider is an important feature in a disability insurance policy because it helps your benefits keep pace with inflation during a claim. How much of an adjustment you would receive and when the first adjustment occurs depends on which Cost of Living Adjustment rider you opt for. There are three COLA riders1,2 that are available.

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


Of the three aforementioned COLA Riders available, the 3% Compound, and 6% Maximum riders will adjusts your benefits beginning on the first anniversary of the date your disability first began and every year while you remain disabled and 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, and all adjustments of benefits are compounded. 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 (typically to age 65, 67, or 70). 


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 claim. Historically, this is also a commonly purchased rider partly due to the popularity of the Provider Choice disability insurance policy.
  • 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 anticipates 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.



checkbook and pie chart graphic

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


For example, if a disability insurance policy paid $100,000 for the first year for a total disability, and if a 3% compounded adjustment was applied for 20 years, the benefit amount after 20 years of total disability benefit would have grown to $180,611 for that year. The same situation under a simple increase would result in $157,000 of benefits for that same year. The accumulated difference becomes greater and greater as more time elapses. 


COLA is more so for the younger policy owners than the older policy owners. Younger policyholders are typically in situations where their financial responsibilities are expected to grow for the next 2 or 3 decades. Mortgages are typically not paid off, kids are on their way and/or existing kids are still dependent, school loans are still existent and retirement accounts are just getting started. 


The remaining working years are longer for younger policy holders than older policy holders. This presents a bigger risk for the younger policy holder if their disability insurance policy does not include a Cost of Living Adjustment rider. The benefit of a Cost of Living adjustment rider is greater for younger policy holders because there are more years to collect benefits and more years to accumulate the compounded increases. 


Older policy holders may not find the Cost of Living adjustment rider as important as before. Kids may have become self sufficient, mortgages and other loans may have been paid off and a significant amount of savings may have been accumulated. The numbers of years until retirement and to the end of the disability benefit period is reduced to a minimum. 


If you are having trouble deciding which of the three Cost of Living Adjustment riders to go with, you can view what other policy holders with your occupation, age range, and gender chose on their disability insurance policy. Each one of the Cost of Living Adjustment riders will help fight off the effects of inflation during a claim. Before a claim occurs, it is important to regularly review your disability insurance coverage with your agent. If the gap between your coverage and your earned income falls below 60%, it may be a good time to up your disability insurance coverage to keep up with your growing income.


Jack Le, CFP®, CLU® holds a Financial Representative contract with The Guardian Life Insurance Company of America based out of New York, NY. Berkshire Life Insurance Company of America, Pittsfield, MA, underwrites and issues the disability insurance policy forms 18ID and 18UD. 

Berkshire is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America which is located in New York, NY. Policy forms 18ID and 18UD provide disability income insurance only. They do not offer major medical insurance, basic medical or basic hospital insurance as set forth by the New York State Insurance Dept. consumer when averaged over all the people who own this policy form. The availability of this policy series, optional riders and provisions, as well as features, may vary from state to state. 

1. If you choose to have an optional rider on your policy your premium will increase. 
2. This optional rider does not necessarily protect against an increase in the cost of living.

 2017-51921 Exp 12/2019


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