Cost-of-Living Adjustment

What Does Cost-of-Living Adjustment Mean?

A cost-of-living adjustment (COLA) is a rider added to a disability insurance policy that adjusts the benefits the insured would receive if they file a disability claim and the disability lasts for more than a year. Based on the terms of the rider, it increases the monthly benefit annually by a specified percentage, typically linked to the consumer price index.

This rider is also referred to as a cost-of-living allowance or a cost-of-living rider.

Insuranceopedia Explains Cost-of-Living Adjustment

The purpose of a COLA rider is to ensure that disability payments keep pace with inflation. However, it is one of the most expensive riders to add to a disability insurance policy. It may be more beneficial for younger policyholders, as they have more working years ahead, allowing them to collect benefits over a longer period and benefit from compounded COLA increases.

COLA also applies to Social Security (SS) and retirement benefits.