Becoming a physician requires years of expensive schooling and rigorous training. When you can no longer work because of an illness or injury, all those years can seem like wasted effort. While disability is a risk for everyone, the stakes are especially high for physicians because their income directly correlates to performing their hands-on duties. Because of this, most physicians invest in disability insurance to protect their future.
Physicians can choose among several riders to tailor their disability coverage to their unique needs. You can add these riders to an insurance policy if you want extra benefits. Learning your rider options is critical to making the most of your insurance policy. This guide looks into the cost of living adjustment (COLA) rider and how it can help physicians protect their income and future.
What Is the COLA Rider?
The value of money depreciates over time due to inflation and the evolving cost of living. However, this fact is not automatically factored into a bare-bones disability insurance policy. Unfortunately, what may seem like an adequate amount of benefit, collecting the same benefit amount may look different in five or ten years. This is where the cost of living adjustment rider comes in.
Disability insurance policyholders can purchase the COLA rider to help their coverage keep pace with inflation. This rider increases the policy’s monthly benefit annually, starting after you’ve been disabled for 12 months. Depending on your chosen carrier, cost of living adjustment riders feature different terms and conditions. Below are the most common types of COLA riders:
- Fixed: Fixed COLA riders feature a specific percentage (typically 3%) that is not tied to the actual inflation rate. Suppose a policyholder has a monthly benefit of $10,000 with a fixed COLA of 3%. If the policyholder became disabled on February 1, 2022, the benefit amount would increase to $10,300 on February 1, 2023.
- Indexed: Indexed cost of living adjustment riders are based on a third-party index, such as the Consumer Price Index (CPI). The COLA rider will typically increase the benefit using the actual CPI in the year it’s being used. Companies will also limit the COLA rider to a certain percentage. For example, you can have a COLA rider that is anywhere from 0 to 3%, tied to CPI.
- Simple Interest: These COLA riders increase the benefit amount yearly based on the original principal benefit amount. For example, if the policyholder begins collecting claims at $10,000 and has a COLA rider that pays 3% simple interest, monthly benefits will increase by $300 yearly.
- Compound Interest: Compounded interest is when COLA riders increase last year’s benefit you were collecting. A compounded interest COLA rider with a 3% rate will increase a $10,000 disability benefit to $10,300 at the end of the first year, then $10,609 at the end of the second year, $10,927 at the end of the third year, and so on until the termination of the benefit.
Does the Cost of Living Adjustment Require Additional Proof of Health?
When you first apply for a policy, medical underwriting will be required whether or not you add the cost of living adjustment rider (COLA). Adding this rider will not change the medical underwriting determination, therefore it is always best to add this rider when you first apply for a policy. You will be able to drop and remove the COLA rider at a future date on your existing policy, without undergoing additional medical underwriting.
If you have an existing policy but want to request to add the cost of living adjustment rider (COLA), you can do so but it will trigger medical underwriting since you are adding a benefit to the policy. If your health has changed since obtaining the policy, it may affect the underwriting decision to add this COLA rider. However, if the company decides they cannot add this rider, they will not change your original policy terms and conditions.
Is the COLA Rider Worth It?
The cost of living adjustment rider can allow your disability insurance coverage to keep pace with inflation during a claim. It raises the policy’s value over time so you get the most from your investment. Without this rider, the benefit amount of the coverage will have less purchasing power in ten or fifteen years.
Young physicians, residents, or fellows should get a COLA rider because inflation can rise dramatically over their careers. This rider can help even seasoned experts acquire maximum coverage. The only people who wouldn’t benefit from a COLA rider are professionals nearing retirement age, because their benefit period may be coming to an end.
Insurers That Offer the Cost of Living Adjustment Rider
Major insurance companies offer the cost of living adjustment rider to help policyholders customize their coverage based on their needs. Depending on the insurer, there may be different options available. Let’s take a closer look at the five major insurance providers and their options for COLA riders.
Guardian offers different types of COLA riders you can add to customize your policy, as follows:
- 3% Compound Cost of Living Adjustment Rider
- 6% Maximum Cost of Living Adjustment Rider
- 4-Year Delayed COLA Rider
The 3% compound will increase the benefit by a fixed 3% every year while collecting claims, with compounded interest.
The 6% maximum COLA rider provides annual compounded indexing of the monthly benefit while benefits are payable, tied to changes in the CPI-U that will never be less than 3% or more than 6%.
However, the 4-year delayed cost of living adjustment rider is a fixed 3% annual compounded indexing of the benefit while benefits are payable, starting on the 4th anniversary of the date you first become disabled.
There are two types of COLA riders Ameritas offers to help policyholders make the most of their coverage:
- Cost of Living Adjustment Rider (COLA) 6% Compounded: As long as you remain disabled, the base monthly benefit will be increased by the lesser of 6% compounded annually or the change in the Consumer Price Index (CPI-U), on each anniversary of the date of disability. This will be a 0 to 6% increase depending on CPI-U, unlike Guardian’s 3 to 6% cola rider.
- Cost of Living Adjustment Rider (COLA) 3% Simple: The 3% simple COLA rider increases the policyholder’s benefit by a fixed 3% interest rate on each anniversary date of the disability. This is not a compound calculation.
Standard helps physicians offset the effects of inflation in their disability coverage by providing two COLA rider options:
- Indexed Cost of Living Rider - 3% maximum increase
- Indexed Cost of Living Rider - 6% maximum increase
The Indexed Cost of Living Rider, a 3% maximum increase, will increase the benefit by 0 to 3% of the previous year’s benefit amount, compounded. The percentage will be determined based on the average annual change in the CPI-U for each year the benefit is payable.
The Indexed Cost of Living Rider, a 6% maximum increase, will increase the benefit by 0 to 6% of the previous year’s benefit amount, compounded. The percentage will be determined based on the average annual change in the CPI-U for each year the benefit is payable.
Principal provides two COLA riders to help policyholders enhance the benefits of their coverage.
- Cost of Living Adjustment - 3%
- Cost of Living Adjustment - 6%
Both of these riders will increase the monthly benefit on a compounded basis each year while collecting claims. They will each be determined by the change in the Consumer Price Index (CPI-U), each year up to a maximum increase of 3% or 6%. If the change in CPI-U is zero or negative, the monthly benefit will remain the same.
MassMutual offers one COLA rider named Cost of Living Adjustment Rider - 3%. After you have been disabled for 12 months, your full benefit will be increased at an annually compounded rate of 3%. This will be a fixed 3%, not tied to the CPI-U.
Need Help Finding the Right Policy?
Investing in disability insurance can help protect your future and financial stability as a physician. Enhancements like the cost of living adjustment rider can further customize your coverage to match your unique needs. However, with so many companies and riders to choose from, it can be challenging to select the right policy. We’re here to help out. Contact us today to discover your options and determine which disability insurance policy is right for you.