A cost-of-living adjustment (COLA) rider on a life insurance policy is designed to:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The COLA rider raises the face amount of the policy at scheduled intervals, often annually, to reflect increases in the cost of living so that the death benefit's purchasing power is preserved over time. The premium usually rises as the benefit increases, or the additional coverage is priced separately. The rider does not alter premium rates by age, does not change the policy's fundamental type, and does not provide income during disability. The additional coverage is usually purchased at attained age without evidence of insurability within the rider's limits.
Why the other options are wrong
- B) COLA increases the benefit and generally the premium too; it does not lower premiums as the insured ages. The additional benefit is typically added without evidence of insurability within the rider's limits.
- C) The rider changes the benefit amount over time; it does not convert the policy from permanent to term insurance. COLA adds coverage and usually raises the premium; it never reduces premiums as the insured ages.
- D) Income during disability is the function of a disability income rider, not a COLA rider. The rider adjusts the benefit amount over time but leaves the policy's fundamental permanent structure unchanged.
Memory hook
COLA rider: the face amount inflates with the cost of living so the policy's promise keeps its buying power.