Policy Riders: A Guide to the Bells and Whistles of Individual Disability Insurance – Part 1

An Introduction to Policy Riders

In this series of posts we will evaluate the policy riders offered by most disability insurance companies in addition to their basic terms of their policies.  A policy rider is an add-on provision at an additional cost that provides you with additional benefits and/or terms not included in a standard policy.  Individual disability insurance policies have very little room for modification or customization outside of choosing your monthly benefit amount. Policy riders allow you to customize certain aspects of your policy based on your individual needs.

Doctors, dentists, and other professionals purchase disability insurance policies to protect their earning potential and the time and money they’ve invested in their careers.  The basic provisions of an individual disability insurance policy, however, may not be enough to protect you in the event of a disability.  Policy riders may be necessary to ensure that your financial future is secure if you become disabled.

In this first post, we will evaluate a common and widely-available policy rider that can help you protect your benefits from a changing economy: the Cost-of-Living Adjustment rider.

Cost-of-Living Adjustment (COLA) Rider

A COLA rider automatically increases your benefit amount by a certain percentage every year to account for increased cost-of-living due to inflation.  To determine the annual percentage increase, your insurer will often let you choose between a set percentage and tying it to an establish index such as the Consumer Price Index (CPI).  Most insurers will cap the overall increase in benefits – often at one or two times the original benefit amount.

Imagine that you become permanently disabled at age 45 due to severe cervical spinal stenosis.  Your individual disability insurance policy pays $20,000.00 per month to age 65.  Ten years in, you’re still receiving $20,000.00 per month, but inflation has risen at an average of 1.6% per year according to the CPI.  Without a COLA rider, your $20,000.00 has approximately $3,440.00 less buying power than it did ten years ago.  With a COLA rider tied to the CPI, your benefit amount will increase along with inflation and at ten years you will receive $23,440.00 per month rather than $20,000.00 per month.

This particular rider is very important for long-term individual disability insurance, and if you are considering purchasing a policy you should strongly consider a COLA rider for the best long-term income protection. It is a fairly expensive increase to your monthly premium, but it will ensure that your buying power and lifestyle are not affected by inflation in the event of a long-term disability.

In our next post, we will discuss the Automatic Benefit Increase rider, the Future Increase Option rider, and how they both allow you to increase your benefits down the road without jumping through the hoops of reapplying for additional coverage.


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