The Benefits of COLA
Inflation has been a major topic surrounding the economy over the past few years. A 2 -3% rate of inflation is normal and expected, but recently the year-over-year rate has been above that. Inflation leads to your purchasing power going down and the cost of everything goes up to account for the reduced value of the dollar. It mainly affects those on a fixed income but can also play a role in a person’s financial planning. If your investments or your wages don’t appreciate past the rate of inflation, then you fall behind and the money you do have has less value. Per the chart below, we’ve experienced high inflation over the past few years and are finally getting back to a more regular rate.
How does this affect insurance?
Well, if you have a disability insurance policy, you may notice a rider on the policy that can counteract inflation. It is called the Cost-of-Living Adjustment (COLA), and its main purpose is to increase the monthly disability claim benefit on your policy by a few percentage points, so your buying power doesn’t decrease.
To understand the financial impact of a 3% compounded COLA rider on a $10,000 monthly benefit, review this 15-year claim timeline:
- [Year 1] $10,000 / month (Base Benefit)
- [Year 5] $11,255 / month (+12.5% increase)
- [Year 10] $13,048 / month (+30.5% increase) │
- [Year 15] $15,126 / month (+51.2% increase)
Historically, US inflation goes up by 35-55% every 15 years. Adding this feature to your disability may cost more in the short-term to add to the policy but it will add a significant benefit if you ever do go on claim. It’s important to have a long-term plan of the purpose of the insurance and how it can best benefit you when you go to use it.
Written by: Jeremy Alfano, Chief Operating Officer - CFS Dental Division
