A cost-of-living adjustment (COLA) rider on a life insurance policy is designed to:

Why A is correct

A cost-of-living adjustment (COLA) rider periodically increases the policy's death benefit to offset the effects of inflation, typically tied to an index such as the Consumer Price Index (CPI), with some policies applying a fixed annual percentage. The rider helps ensure that the insurance protection keeps its purchasing power over time. The additional coverage may require slightly higher premiums, and the increases are often limited to a specified maximum percentage each year. COLA riders are commonly offered on disability income policies and can also be added to life insurance.

Why the other options are wrong

• The rider affects the death benefit, not the premium structure; premiums generally remain level and are not reduced as the insured ages. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.
• Converting the policy to term insurance is a separate feature of convertible term policies, not a COLA rider. This option therefore does not match the facts presented in the question and is not the correct answer to select.
• The COLA rider is tied to inflation indices, not dividend performance; it operates independently of participating dividends. This answer describes a different situation from the one in the question and is therefore incorrect under the facts given here.

Memory hook

The COLA rider lets the benefit grow so inflation cannot shrink it.