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Cost of Living (COLA) Rider in Disability Insurance Policies

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As the cost of goods and services rise each year, the purchasing power of a set amount of money decreases. For example, the average cost of a new home in the U.S. in 1997 was $179,500; today it’s more than double at $368,000.

That’s why it’s important for workers to receive an increase in income each year.

But what if you’re receiving disability benefits because of an injury or illness that prevents you from working in the medical field? If those benefits don’t increase, their purchasing power will slowly erode the longer you’re unable to work. That’s where a cost of living adjustment rider can help.

What is a cost-of-living adjustment rider?

To help offset the risk of inflation, most disability insurance companies offer cost-of-living adjustment (COLA) riders which can be added to your disability insurance policy.

A COLA rider is an optional add-on to a long term disability insurance policy that will help any benefits that you are paid keep pace with inflation in the event that you become disabled. If your policy has this rider, your benefits will increase annually, typically starting after you’ve been disabled for 12 months. This rider will increase the premiums you pay for your disability insurance policy.

It’s important to note that a cost-of-living adjustment rider kicks in when you become disabled, and won’t make up for the period between when you first purchased your policy and when you filed your disability insurance claim.

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How much does a COLA rider increase disability insurance benefits?

There are typically two ways that insurers factor benefits increases.

The first is a fixed percentage increase, such as 3 percent annually, that will remain unchanged for as long as you collect benefits. The other is using a third-party index, such as the Consumer Price Index. If the index increased 2.5 percent during the year, your benefits will increase 2.5 percent.

Riders that pay a fixed rate for COLAs typically increase benefits by 3 percent. Those that are based on a third-party index will set a minimum of 1 percent or 2 percent, and a maximum cap, usually 6 percent.

Some disability insurance carriers, such as Ameritas and Ohio National, offer clients a choice between a 3-percent fixed rider and one based on the Consumer Price Index with a minimum and cap.

Simple interest vs. compound interest

If your policy’s rider pays a fixed percentage, you should verify whether the increase uses simple interest or compound interest.

Simple interest increases the amount based on the original benefit amount. For example, if you receive $10,000 in monthly benefits with a COLA rider that pays 3 percent simple interest, your monthly benefits will increase $300 every year. So in the first year, your benefits will be $10,000 a month. In the second year, your monthly benefits will total $10,300. In the third year, your benefits will equal $10,600.

Compound interest is calculated on the principal and also any accumulated interest. So using the above example, benefits for the first and second year will be $10,000 and $10,300, respectively.

But in the third, instead of adding just $300 like with the simple interest calculation, the 3 percent adjustment is based on the previous year’s benefits of $10,300. So the increase will be $309 (10,300 x 3%) so your monthly benefit in the third year is $10,609. You would then add 3 percent to that total to get your fourth-year benefit of $10,927.27 (10,609 x 3%).

What happens to my benefit amount once I’m able to work again?

Each company’s cost of living adjustment rider can vary based on what happens to the benefit amount once you return to work. Some riders reset the rider back to the original benefit amount that your policy started with. For example, say your original benefit was $10,000 a month. After three years with a 3 percent fixed annual increase, you were receiving $10,600. Then you returned to work, at which point benefits stopped. If you became disabled again, your benefits would reset to $10,000.

Some insurers enable you to purchase the additional increase from the COLA rider, which will increase your premium. Others will allow you to continue your policy benefit at the increased amount without increasing your premium.

Do I need a cost of living adjustment rider?

In addition to comparing COLA riders, it’s important for doctors to consider whether the rider benefit is worth the increase in premium.

The younger you are, the more you should consider a COLA rider. Without the rider, your benefit amount will remain the same for the length of your benefit period. If inflation averages 3 percent a year, your level benefit amount will have a third less purchasing power in 15 years. A COLA rider, on the other hand, will help your benefit amount keep pace with inflation for as long as your receive payments. It’s also important to note that a COLA rider can make other riders on your policy more expensive. For example, a COLA rider can make it more expensive to have an own occupation rider on your policy.

What percentage of doctors have a cost of living adjustment rider in their disability insurance policy?

According to the 2018 Report on Long Term Disability Insurance for Doctors, approximately 72 percent of doctors have a cost of living adjustment rider in their policy. Of those that have a COLA rider, an estimated 94.8 percent have a 3% increase while only 5.2% have a 6 percent increase cost of living adjustment rider.

Who Offers Disability Insurance for Physicians?

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A.M. Best Rating
Definition of Disability
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AMA
A.M. Best Rating N/A
Definition of Disability N/A
Future Increase Option N/A
Residual Benefit N/A
States Available In Available in 55 states. (View States)
States Available
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Ameritas_Logo_mqinpj Ameritas
A.M. Best Rating A
Definition of Disability Own-Occupation Definition
Future Increase Option Available annually to age 55
Residual Benefit Requires 15% loss of income
States Available In Available in 51 states. (View States)

Ameritas Life is as reputable as any name in the insurance industry. However, it’s actually a newcomer to the disability insurance space in comparison to its competitors. DInamic Foundation is its best disability insurance product for doctors. Policies are underwritten and issued by Union Central Life, its wholly-owned subsidiary.

Ameritas features a true own-occupation definition of disability. This provision benefits you if an accident or illness prevents you from practicing your specialty.

DInamic Foundation requires you to choose between non-cancelable coverage and guaranteed renewal. The maximum benefit period available is to age 70. Ameritas offers basic and enhanced residual disability riders. It also offers two different COLA riders.

    Pros
  • True own-occupation provision.
  • Lowest premium amount.
  • Two COLA rider and residual disability options.
  • Various add-ons such a good health benefit, presumptive total disability benefit, COBRA premium benefit, partial disability benefit, and non-disabling injury benefit.
    Cons
  • Slower customer service.
  • Lowest maximum policy benefit: $20,000 per month.
  • Must choose between non-cancelable coverage and guaranteed renewal.
  • For certain occupation classes, the own-occupation provision is only available for five years.
States Available
  • Alabama
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Guardian
A.M. Best Rating A++
Definition of Disability Own-Occupation Definition
Future Increase Option Available annually up to age 55
Residual Benefit Requires 15% loss of income
States Available In Available in 50 states. (View States)

As one of the largest, most trusted mutual insurance companies in America, Guardian Life is the Cadillac of its industry. Its disability insurance product, ProVider Choice, is a great fit for doctors. Policies are underwritten and issued by Berkshire Life, a wholly-owned stock subsidiary.

According to Guardian, total disability occurs when injury or illness prevents you from performing your occupation. For doctors, more than half of your income must come from hands-on patient care or surgical procedures to qualify.

Guardian’s true own-occupation definition of disability guarantees full benefits. It still applies if you’re able to maintain gainful employment in another occupation. In fact, you may be able to benefit if you can still practice your specialty with major limitations.

Coverage is non-cancelable and guaranteed renewable to age 70. You may elect 10-year, five-year and two-year benefit periods. Guardian offers 30-day, 60-day, 90-day, 180-day, 360-day and 720-day elimination periods.

Unlike other providers, Guardian features three cost-of-living adjustment (COLA) rider options. As for residual disability, Guardian offers both basic and enhanced partial riders.

    Pros
  • True own-occupation provision.
  • Highest COMDEX score: 99.
  • Highest maximum policy benefit: $20,000 per month.
  • Simplified underwriting for up to $7,500.
  • Various options for benefit and elimination periods.
  • Various options for COLA and residual disability riders.
  • Various add-ons such as an automatic benefit enhancement, benefit purchase option, catastrophic disability rider, hospice care benefit, serious illness supplemental benefit and student loan protection.
    Cons
  • Highest premium amount.
  • No presumptive total disability benefit.
States Available
  • Alabama
  • Alaska
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  • Arkansas
  • California
  • Colorado
  • Connecticut
  • Delaware
  • District of Columbia
  • Florida
  • Georgia
  • Hawaii
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massmutual-physician-disability-insurance_zalsic MassMutual
A.M. Best Rating A++
Definition of Disability Own-Occupation Definition
Future Increase Option Available annually up to age 55
Residual Benefit Requires 15% loss of income
States Available In Available in 50 states. (View States)

MassMutual has been a mainstay in the insurance game since 1851. MassMutual offers two disability insurance products, Radius and Radius Choice. Both feature provisions and add-ons that allow you to customize your coverage to meet specific needs. MassMutual helps you protect your income and retirement without relinquishing payment control.

MassMutual features a true own-occupation definition of disability. However, the provision is not part of your base policy. You must purchase it as an additional rider. With this provision in place, ‘total disability’ occurs when you cannot perform the main duties of your occupation. This requires you to be under a physician’s care.

Both Radius and Radius Choice are non-cancelable and guaranteed renewable to age 65. Radius is conditionally renewable for life, while Radius Choice is only until age 74. Both policies have benefit periods available to ages 65 and 67, as well as two years, five years and 10 years. Radius Choice also offers a maximum benefit period to age 70. Both policies offer elimination periods of 60 days, 90 days, 180 days, one year and two years.

MassMutual offers one cost-of-living adjustment (COLA) rider. After your first year of disability, your monthly benefit increases by a set percentage each year. MassMutual offers one option with basic criteria that increases your chance of qualifying.

    Pros
  • True own-occupation provision.
  • Various add-ons such as an automatic benefit enhancement, catastrophic disability rider, future increase option, presumptive total disability benefit and student loan protection.
    Cons
  • Own-occupation provision sold separately.
  • Only one COLA rider and residual disability rider option.
  • No benefit purchase option, hospice care benefit or serious illness supplemental benefit.
States Available
  • Alabama
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Ohio_National_Disability_vvtk3o-thumb Ohio National
A.M. Best Rating A+
Definition of Disability Own-Occupation Definition
Future Increase Option Available annually to age 60
Residual Benefit Requires 15% loss of income
States Available In Available in 38 states. (View States)

Ohio National’s disability insurance product is relatively new to the market. Still, it’s among the best money can buy. ContinuON Income Solutions II allows you to customize your coverage without losing control of premium expenses.

Ohio National offers its true own-occupation provision as a rider. Regardless of occupation class, it does not come with your base policy. With Ohio National, total disability occurs when you’re unable to perform the material and substantial duties of your specialty. To qualify, you must be under the care of a physician.

ContinuON Income Solutions II is guaranteed renewable on an annual basis. Coverage is non-cancelable as long as you consistently pay on time. Benefits periods include age 65, 67 and 70. Two-year, five-year and 10-year benefit periods are also available. Ohio National offers 60-day, 90-day, 180-day and one-year elimination periods.

Ohio National offers both a 3% and a 6% COLA rider. Policyholders may elect the basic or enhanced residual disability rider.

    Pros
  • True own-occupation provision.
  • Excellent customer service.
  • Various add-ons such as a hospice benefit, survivor benefit and recurrent disability benefit.
    Cons
  • Lowest physical and labs limit means simplified underwriting is only allowed for up to $3,000 per month.
States Available
  • Alabama
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Principal Logo Principal
A.M. Best Rating A+
Definition of Disability Own-Occupation Definition
Future Increase Option Future Increase Option
Residual Benefit Requires 20% loss of income
States Available In Available in 50 states. (View States)

Principal Life is among the most competitive providers in the disability insurance market. HH750 is an excellent option for doctors seeking a top-shelf disability insurance product. It features a wide variety of options that afford you maximum flexibility.

Principal Life is among the most competitive providers in the disability insurance market. HH750 is an excellent option for doctors seeking a top-shelf disability insurance product. It features a wide variety of options that afford you maximum flexibility.

Principal offers both a true own-occupation and a modified own-occupation provision. A true own-occupation provision is the best bet for highly-skilled individuals like doctors. You benefit if you become unable to perform the material and substantial duties of your specialty. It still applies if you can maintain gainful employment in a different occupation.

Modified own-occupation is a watered-down version of the former. Frankly, it’s only feasible if you’re cost is a concern. The definition of disability is the same, but you will not benefit if you can fulfill another occupation. Either way, both provisions are available as part of your base policy. You do not have to purchase an additional rider.

HH750 is non-cancelable and guaranteed renewable to age 65. Benefit periods are available to ages 65, 67 and 70, and for two years and five years. Principal features 30-day, 60-day, 90-day, 180-day and one year elimination periods.

Principal offers one cost-of-living adjustment (COLA) rider. After selecting a maximum benefit between 3-6%, it increases on a compound basis. Principal also offers one partial residual disability rider.

Modified own-occupation is a watered-down version of the former. Frankly, it’s only feasible if you’re cost is a concern. The definition of disability is the same, but you will not benefit if you can fulfill another occupation. Either way, both provisions are available as part of your base policy. You do not have to purchase an additional rider.

HH750 is non-cancelable and guaranteed renewable to age 65. Benefit periods are available to ages 65, 67 and 70, and for two years and five years. Principal features 30-day, 60-day, 90-day, 180-day and one year elimination periods.

Principal offers one cost-of-living adjustment (COLA) rider. After selecting a maximum benefit between 3-6%, it increases on a compound basis. Principal also offers one partial residual disability rider.

    Pros
  • True and modified own-occupation provisions.
  • Advisor’s Choice Award for advisor support.
  • Available to those who only work 20 hours a week.
  • Simplified underwriting for up to $6,000 per month.
  • Various add-ons such as a benefit update rider, catastrophic disability rider, future benefit increase rider, presumptive total disability benefit, and serious illness benefit.
    Cons
  • The modified own-occupation provision can be misleading. It can save you money now, but you will not receive as strong of benefits as true own-occupation.
States Available
  • Alabama
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The Standard Logo The Standard
A.M. Best Rating A
Definition of Disability Own-Occupation Definition
Future Increase Option Available annually up to age 55
Residual Benefit Requires 20% loss of income
States Available In Available in 50 states. (View States)

The Standard is among the largest, most trusted providers in the disability insurance space. The company has several options, but Platinum Advantage is the most beneficial for doctors. It features built-in provisions and additional riders that maximize income protection.

The Standard’s true own-occupation definition of disability is available as an additional rider. With this provision in place, ‘total disability’ occurs when you are unable to perform the substantial and material duties of your specialty. You must also be under the care of a physician to qualify.

Platinum Advantage is guaranteed renewable to age 67. To make your policy non-cancelable, you must purchase an additional rider. Benefit periods are available to ages 65 and 67, as well as two years, five years and 10 years. Elimination periods of 60 days, 90 days, 180 days and one year are available.

The Standard offers one cost-of-living adjustment (COLA) rider. After selecting a maximum benefit between 3-6%, it increases annually on a compound basis according to the Consumer Price Index. The Standard offers a basic residual disability rider.

    Pros
  • True own-occupation provision.
  • Wide variety of options and strong coverage guarantee.
  • No-cost riders and benefits, such as the family care benefit.
  • Various add-ons such as an automatic increase benefit rider, benefit increase rider, catastrophic disability rider, family care benefit, premium waiver benefit, presumptive total disability benefit, student loan rider and survivor benefit.
    Cons
  • Own-occupation and non-cancelable riders sold separately.
  • Only one COLA rider and residual disability rider option.
  • Lowest COMDEX score: 79.
States Available
  • Alabama
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  • District of Columbia
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  • New Mexico
  • New York
  • North Carolina
  • North Dakota
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  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Vermont
  • Virginia
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming
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