A cost-of-living adjustment (COLA) rider on a life insurance policy serves to:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A COLA rider automatically increases the amount of coverage or benefits on a policy to help offset the effects of inflation, often tied to an index such as the Consumer Price Index. On a life policy it can raise the death benefit, and on disability riders it can increase monthly benefits. The rider typically requires no evidence of insurability for the increases and is designed to preserve the purchasing power of the protection over time. Because the increases are automatic, the owner does not need to apply or prove insurability each time, which is a meaningful convenience for keeping coverage in step with rising costs.
Why the other options are wrong
- B) COLA increases benefits with inflation; premiums under the rider are not reduced as the insured ages, and premium reduction is not its purpose. Premiums under a COLA rider are not reduced with age; the rider only raises benefits with inflation.
- C) A guarantee that cash value never decreases describes a minimum interest or no-lapse feature, not an inflation adjustment rider. Cash value guarantees come from the policy's interest guarantees, not from a COLA rider.
- D) Double indemnity is the accidental death benefit, a separate rider; COLA has nothing to do with accidental death. Accidental death double indemnity is a wholly separate rider with its own trigger.
Memory hook
COLA = coverage that grows as prices crawl, keeping protection from shrinking.