What Is COLA Insurance?

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A disabled man in a wheelchair.
A disabled man in a wheelchair. (Image: Yuri Arcurs/Hemera/Getty Images)

When a person becomes disabled by injury or illness, he may be unable to continue to earn a living. Having a COLA insurance rider that protects the value of your disability insurance income may be especially important if you become disabled.

COLA

A COLA, or Cost of Living Adjustment rider, is an option available when a person purchases disability insurance. The COLA rider adjusts the amount of your monthly disability income according to inflation, so that the real value of your benefit does not change. The amount of inflation protection available depends on the disability plan and the anticipated long term needs of the person buying the insurance. Policy holders should mention their interest in a COLA rider when applying for disability insurance.

Coverage

Cost of Living Adjustment riders usually only adjust when the policy holder becomes totally disabled and is receiving disability benefits. Likewise, the policy holder may be required to have received benefits for one full year, before being eligible to receive adjusted monthly payments. As inflation increases so does the cost of every day expenses such as housing, food, and transportation. Having a COLA rider on your disability insurance can protect your long term financial well-being.

Increase

The benefit increase on your COLA rider remains the same throughout your disability coverage, so it is important to choose an adequate but cost effective rate. If a person become disabled and has a policy plan worth $5,000, with a 3 percent COLA rider he receives $5,150, ($5,000 X 0.03) the first year that his benefit increases. Likewise, since this interest is compounded each year, he receives $5,300 ($5,150 X 0.03) the second year and so on for each year he receives benefits.

Considerations

If you work in a physically intensive profession or you anticipate the possibility of disabling illness in the future, a COLA rider can be critical to your long-term financial and physical health. COLA riders are most beneficial when purchased by those with the longest number of potential benefit years. As a result, those nearing retirement or those with a short benefit period may not find it financially advantageous to invest the extra money required to obtain such coverage.

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