A cost-of-living adjustment (COLA) rider on a life insurance policy:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A COLA rider periodically increases the policy's face amount based on changes in a cost-of-living index, such as the Consumer Price Index, so that the death benefit keeps pace with inflation. The additional coverage typically requires additional premium, which may rise as the coverage increases. The rider addresses the erosion of a fixed death benefit's purchasing power over time. It is one of the recognized life insurance riders in the exam outline. This rider is particularly attractive to clients with long-term coverage needs who are concerned about inflation.
Why the other options are wrong
- The COLA rider adds coverage and premium; it does not reduce the premium in any year.
- The rider adjusts the death benefit; it does not guarantee that cash value growth will match the rate of inflation.
- No COLA rider converts the policy into an annuity at age 65; the policy remains life insurance.
Memory hook
COLA rider = the death benefit grows with the price of living, so inflation cannot quietly shrink it.