Disability Insurance Articles
A Cost Of Living Adjustment Rider And When It Is A Good Idea To Add To Disability Insurance
2010-05-15
When taking out an insurance policy, it helps to think long-term. This is especially important when it comes to disability coverage as you may depend on this to provide regular payouts in the future. A cost of living adjustment rider (COLA) is an added feature which can be included in your insurance policy. It takes annual inflation into account and adjusts your benefits accordingly. This ensures that the money you receive will always retain its buying power so that your lifestyle is preserved. Adding this to your insurance policy will increase your premiums slightly but the overall cost is well worth it when you consider the added protection that you will receive.
There are many varieties of COLA riders on the marketplace. The simplest offer a fixed benefit with the most common types being set at 6%. This means that a $5,000 monthly payout will increase to $6,312 five years later. Since this amount will keep on increasing, it is obvious to see how fast it can grow if you wait a while. You can also take out a disability insurance policy where the COLA fluctuates between 1% and 6% depending on the Consumer Price Index (CPI). While on this type of plan, the total benefits will alter depending on how inflation increases that year. Make sure to read the fine print to find out exactly how the COLA you are looking at changes its payouts over time.
Because adjusting for cost of living is a long-term process, the younger you are when you take out a COLA rider, the better. By leaving it too late, the additional yearly costs might actually be more than the increase you get with a cost of living adjustment rider. On the other hand, by taking out a COLA rider as soon as possible, say prior to your 40th birthday, the results will be well worth it. The final figures will depend on the individual contract but you could end up seeing an increase of over $15,000 per year after 25 years. Imagine the difference this amount of money could make to your life.
If you are starting early, adding a COLA to your insurance policy can be recommended. Through a slow accumulation over several decades, the final payouts will be far above those policies which do not include this adjustment. However, if you are middle-aged or older, then the usefulness of a COLA is severely diminished. Double check with your provider first before adding this feature to your disability insurance policy as it may not be worth the raised premiums that come as a result. In either case, the added information will give you the ability to make a smarter decision.