What is the purpose of a cost-of-living adjustment (COLA) rider on a disability income policy?

Why A is correct

A COLA rider increases the disability benefit amount over time while the insured remains disabled, protecting the benefit's purchasing power from inflation. A fixed monthly benefit that seemed adequate when the policy was purchased may erode in real value during a disability lasting years, so the rider steps up or compounds the benefit periodically, commonly at an annual rate or in line with an inflation index. The rider adds to the premium cost, but it is valuable for long-term disabilities in which the insured depends on the benefit for years.

Why the other options are wrong

• B) A COLA rider enhances the benefit amount and therefore adds to the premium cost. It does not reduce the premium as the insured ages; premium reductions are not a function of this rider.
• C) The elimination period is fixed when the policy is issued and is not changed by a COLA rider. COLA addresses the benefit amount during an ongoing disability, not the waiting period.
• D) COLA increases the benefit amount within the policy's stated benefit period; it does not extend the maximum duration of benefit payments. The benefit period remains exactly as written in the policy.

Memory hook

COLA raises your disability check so inflation doesn't shrink its buying power.