Cost of Living Adjustment (COLA) and Catastrophic Disability Riders

The Cost of Living Adjustment (COLA) and Catastrophic Riders are both optional riders that can be included as part of your Disability Plan.  These riders serve separate purposes; so, I’ll break them both down individually.

Cost of Living Adjustment (COLA) Rider

The Cost of Living Adjustment Rider is most commonly referred to as the COLA rider and is essentially designed to combat “inflation”.  During a span of five, ten or twenty years, it’s easy to observe the rising cost of life’s necessities, such as gasoline, food, housing, utilities and many other daily needs. Not taking inflation into account when customizing your Disability Plan can prove very costly should a disability occur and that’s where the COLA rider can come into play.

If you choose to include this rider on your plan and you become disabled, your benefits would increase each year that you remain disabled in effort to keep up with rising costs so that you can maintain your standard of living.  If your disability lasts longer than two or three years, you would definitely notice the value of the COLA rider’s protection since your benefits would increase significantly over time.

It’s good to know that each carrier offers different versions of the COLA rider.  Some carriers allow your benefits to increase by a flat 3% each year, while other options are tied to the Consumer Price Index (CPI) to determine how much your benefits would increase yearly.  You can also choose between your benefit increase occurring on a “simple” or “compound” interest basis.  

It’s typically recommended that if you are a young professional (especially if you are still a resident or fellow in training), that you strongly consider getting this rider, as there is still a significant amount of time left in your career.   As you get midway through your career, you could drop the rider from your plan to reduce your premiums since there is less time left for the rider to make as big an impact.  This is a very common strategy.  

If you’re already later into your career, the increase in premiums might not be justified.  A good insurance agent will help you examine your options to determine if you need the COLA rider, and if so, which version would best suit your needs. You would ultimately have to decide what feels right for you in this regard, but a good agent will help you navigate your options and have your best interest at heart.

Catastrophic Disability Rider

Now, on to the “Catastrophic Rider”.  There is a list of criteria that would have to be met for a disability to be considered catastrophic.  Most insurance carriers have very similar language in this area, but in general, a catastrophic disability would commonly include: loss of a hand or foot; loss of eyesight; loss of speech; loss of hearing; quadriplegia; paraplegia, Alzheimer’s and other injuries and/or illnesses of this nature.

It is important to note that your disability plan automatically includes “Catastrophic Coverage”.  You do not need to add the Catastrophic Rider in order to be covered in a catastrophic disability scenario and receive your regular disability benefits.  In the event your disability is considered “catastrophic”, however, having a Catastrophic Rider included in your disability plan could increase your benefits anywhere from an additional $5,000 to $10,000 a month (on top of your regular benefits)! And typically, you can add this rider for a relatively low cost–sometimes only a few dollars per month–depending on how your plan was originally designed.

If you decide to include either of these riders, it would definitely increase the strength of your Disability Plan’s benefits, but would also result in an increase in premiums.  So, it’s important that you consult a knowledgeable agent who will help you tailor your plan to fit your current budget while protecting your financial future.  

As always, we’re here to help!

Chris Wimberly

The Disability Doc

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*This information is solely used for general market educational purposes.  It does not provide legal rights or actual carrier policy language.  Please review the respective policies for the complete terms and conditions.