Inflation has driven up the cost of everything from gas to food to everyday goods. So any money you have coming in needs to keep up with rising prices. If you’re paying for a disability insurance policy, chances are the monthly benefits you’d claim if you become disabled wouldn’t match the cost of inflation. The COLA rider in a physician disability insurance policy was designed specifically to solve for that.
What is a COLA Rider in a Disability Insurance Policy?
A cost-of-living-adjustment rider is an add-on to your disability insurance policy that will help your benefits keep up with the cost of inflation. The rider can increase your benefit by the percentage of the current inflation rate, so you’re not getting less of a payout each year as the cost of living rises. There are a few different types of COLA disability insurance riders that all calculate the percentage increase applied to your monthly or yearly payout differently.
Fixed COLA Rider
Fixed COLA riders offer a specific fixed percentage increase each year on your disability insurance benefit. You can find 1%-3% increases, all the way up to 10% increases that will raise your benefit on the anniversary of your policy. For example, if you get $1,500 in insurance benefits each month but you have a COLA rider in place, after a full year your payments will increase to $1,545. That increase continues each year in order to offset inflation.
Indexed COLA rider
Indexed COLA riders offer increased payments based on an index like the Consumer Price Index (CPI). The CPI gauges the rate of inflation by tracking everyday goods (i.e. food, gas prices, and utilities). The catch with this type of COLA is that if there is no inflation one year, your benefit payments will not rise that year.
Simple-Interest vs Compound-Interest COLA riders
A simple-interest rider is similar to the fixed COLA rider, but applies the same percentage by year. A compound-interest COLA rider applies to your accumulated benefit. This means a simple-interest rider may increase your benefit by say $500 each year, whereas a compound-interest rider will increase by $500 the first year and then $515 the second year, etc. If you have both options, a compound-interest rider is probably the way to go.
How to Calculate the Cost of Living Adjustment?
There are two ways to calculate a cost of living adjustment: level percentage or a CPI model, with the latter being the more common. A level percentage increase means your payment will increase by a set amount each year. The percentage increase ranges from anywhere between 1%-6%. When inflation is low or moderate, this may be the right option. However, if inflation is high, set increases may not be enough. If that’s the case, a CPI-based COLA may be the right move instead. It’s based on the Consumer Price Index, which is what you typically hear anytime anyone refers to inflation. It tracks everyday goods and services in order to understand inflation. Generally, this type of rider will be able to keep up with inflation a bit more.
How to Add COLA to a Physician Disability Insurance Policy
To add the COLA rider to your current disability insurance coverage, start with your current insurer. Contact your agent and ask them to help you add the rider to your policy. Be sure to ask about costs and clarify what type of COLA rider you’re getting. Many big-name insurers offer COLA riders, including MetLife and Ameritas.
Should you get a COLA Rider?
Still on the fence whether to add a COLA rider to your physician disability policy? Consider the following points.
Makes sense for mid-career physicians
For many physicians, a COLA rider is well worth the cost. Most physicians make quite a bit of money and, in the event that they become temporarily or permanently disabled, they could find it difficult to maintain the same style of living if their disability payments aren’t high enough. The COLA rider ensures that the disability insurance benefits can actually help pay for your lifestyle, even as inflation increases.
May NOT make sense if you are close to retiring
One of the only times a physician may not consider adding a COLA rider is if they’re close to retirement, as their disability insurance policy may be ending at that point. In addition, younger doctors who want to keep their premiums as low as possible may not want to take on the additional cost of adding a COLA rider to your policy.
If inflation is low, you have other options
Finally, during times of low inflation, taking out a COLA rider can wait. There are better, less expensive options you can take out during these times.
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Options Beyond the COLA Rider
Typically, a COLA rider only increases your benefit by a small amount each year, so there are other options worth considering. Two other popular options include the AIB and FIO riders.
AIB rider
Rather than following inflation, the AIB rider (or the Automatic Increase Benefit) automatically increases your disability insurance coverage as your salary goes up. It’ll automatically increase your benefit for the first four-five years, and requires no additional work on your part. It is important to note here, however, that as your benefit increases, so will the premium you pay each month (insurance companies don’t give away anything for free). As your salary increases though, this may not be an issue. Just make sure you talk with your insurance agent to understand any stipulations your policy may come with. For example, there may be age restrictions or you may forfeit benefits if you opt to decline an automatic increase one year.
FIO rider
The Future Increase Option (FIO) rider is similar in many ways to the AIB rider. While it won’t automatically increase your benefit each year, it is a great option for younger physicians who want to keep premiums low until they can grow their career. When you want to increase your coverage, you do have to take action, but you won’t have to deal with automatically rising premiums each year.
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