Most individual disability insurance policies already have built in riders and definitions such as own occupation. However, one rider that typically needs to be added is the COLA Cost of Living Rider. Is it worth having on your policy?
The COLA rider is the most often misunderstood rider. Here we will break it down and provide some guidelines to help you determine if the COLA rider is suitable for you when purchasing an individual disability policy.
- The COLA rider activates once you are on claim for at least 1 year. Most people assume that if they put the COLA rider on their policy, their benefits will go up each year. This is true of riders such as a future benefit increase or automatic benefit increase rider.
- Not all COLA riders are the same. Read the fine print. Some riders pay benefits with simple interest and some with compound interest. Compound interest will pay significantly more if you are on claim for a long period of time.
- Most policies give you the option of a 3 or 6% cost of living rider.
- Some policies have a range they will pay at the time of claim. For example, they will offer a 1-3% or 0-10% COLA rider. This means that each year you are on claim, the COLA will be determined that year by the CPI-U. If there is no inflation that actual year, your benefit will not increase. If inflation is 4% that year, your benefit will increase by 4% that year.
Cost of Living riders are usually the most expensive riders and they tend to be the rider that people question if it should be added to their policy.
- The younger you are, the more important the COLA rider becomes because you have the longest potential period of a claim. A good rule of thumb is to add the COLA rider if you are below the age of 45 or 50 (depending on cost).
- If you have a long benefit period on your policy such as age 65 or 67, you ought to consider the COLA rider because of the potential benefit period.
- If your policy only has a 5 year benefit period, you may want to drop the COLA rider. Since the COLA would only pay benefits after 1 year on claim, you would only receive benefits for 4 years.
- Price it out. Make sure you are aware of the cost of the COLA rider. If you are on a budget, price out the premium with and without the COLA rider.
If you purchase a policy with the COLA rider, you can remove it in the future by submitting simple paperwork.
If you purchase your policy without the COLA rider and later want to add it to the policy, you would need to go through the underwriting process to add the rider to the policy.
For more information about the COLA rider or to request a personalized quote comparison, contact Set for Life Insurance today!