The Cost of Living Adjustment Rider (COLA Rider) for Disability Insurance
- 6 days ago
- 7 min read
Disability insurance is one of the most important financial guardrails a doctor can have in place, but given how long most physicians will hold these policies over the course of their career, the value of the disability benefit can lose value compared to purchasing power over time. Having a Cost of Living Adjustment Rider (COLA rider) on your disability insurance policy can help provide stable income that keeps pace with rising costs, versus having to adjust your lifestyle over time to a fixed disability benefit. The COLA rider is a common disability insurance policy riders that doctors consider, but it can be expensive to add. Below, we cover how the COLA rider works and some common questions asked to help physicians decide if they should include this option in their disability insurance policy.
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What is the Cost of Living Adjustment (COLA) rider for disability insurance?
The goal of the Cost of Living Adjustment (COLA) rider is to protect the spending power of your monthly disability insurance benefit from the effects of inflation. Having a COLA rider increases your disability benefit each year while you remain disabled, which helps your income keep pace with inflation.
Without a COLA rider, your disability insurance benefit remains fixed at the amount you were approved for at the start of your disability. With a COLA rider, your benefit automatically increases annually while disabled. The benefit increase is typically based on an inflation index, such as the US Consumer Price Index (CPI) or a fixed percentage, such as 3% or 4%.
How a Cost of Living Adjustment rider works
It’s important to note that this rider doesn’t go into effect until after you are disabled. Once you qualify for disability benefits, the benefit amount after payouts begin will start to increase annually, usually starting after 12 months of benefit payments. The amount the benefits increase will be tied to the inflation index or the fixed rate noted in your policy.
These varying percentages can add up over time and may offer significant differences year to year, so it’s important to make sure you understand the terms of your rider and that you compare apples to apples when pricing policies. Looking at the US Consumer Price Index often used, the average annual rate over the past decade was around 2.8%. During that time, it was almost 0% one year but over 6% another.
Of note, even if your COLA rider is tied to an index, it typically has an annual cap rate. This is often between 3%-6%.
Policies may or may not use a compound increase, which means that each year’s increase builds on the previous year’s benefit. This is a key distinction that’s important to know, as it can add up significantly over decades when looking at the long-term benefits amount.
This rider usually applies to both the total disability benefit and the residual disability benefit, but may not apply after partial recovery. Check to make sure what’s covered, as this can also make a difference.
How much does the Cost of Living Adjustment rider cost to add to my policy?
The COLA rider is typically an optional addition to your policy that you must pay for, and it can be expensive to add (some say by 10-25% even). Insurance companies may price it differently, so it’s important to shop around to find the best deal for the policy (with optional riders) that works best for you. The exact amount it will cost will depend on your age, the amount of your benefit, what percent the COLA benefit is for, and how the benefit is underwritten.
Some policies offer an inflation protection rider, which is similar. This is also typically an optional add-on, and the cost-benefit analysis is similar to that of the COLA rider. Another consideration to look into that might be suitable is the future increase option rider.
Where can I get a disability policy with a COLA rider?
We recommend shopping for a true own-occupation disability insurance policy with an independent insurance broker. They shop all the major carriers and may have access to exclusive discounts. Our following partners can help you compare policies with riders:
Pattern: This convenient option will allow you to enter your information and immediately begin generating quotes from the major disability companies, as well as schedule a meeting with the Pattern team to discuss the options and figure out which plan is best for you. Many in the group have had a great experience with this process. Contact them here.
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Moment Insurance: Complete your quote inquiry information in less than five minutes and easily schedule an appointment to speak with a dedicated, experienced disability insurance expert who will walk you through the process from start to finish and help you compare different options. Many in the group have worked with their experts previously, and had a great experience! Contact them here.
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PolicyGenius: This is not a physician specific company, but well known in the insurance space. They may be a helpful resource if you are looking for another place for quotes. Make sure that you're comparing apples to apples in terms of true own occupation insurance, as not all fields emphasize the need for this equally. Contact them here.
When does it make sense to have a COLA rider?
This is hard to gauge with 100% certainty because the future isn’t predictable, but there are guidelines to help assess if a COLA rider makes sense.
In general, when you are young and healthy and early in your career, many insurance brokers say that it makes sense to first maximize the benefit amount before paying additional premiums for the COLA rider coverage.
If you have the extra budget after that, paying for the COLA rider can make a huge difference if you become disabled early in your career, so you should consider adding it as an early career physician. If you don’t have disability insurance, you should get one immediately. About 1 in 4 of now 20-year-olds will become disabled during their career (though again, we don’t have a crystal ball to predict when exactly that will happen).
If you are later in your career and will only be receiving benefits for a short period of time, the spending power of that benefit isn’t likely to change so substantially that you need to spend more money on this disability insurance rider. As you look at disability insurance in your later decades, this rider makes less sense.
Other things that may affect whether you think the COLA rider matters to you is how quickly you anticipate building wealth and needing your disability insurance policy, how many other passive income streams you have, and what other backup measures you have in place for disability are.
Overall, a COLA rider is most beneficial to those in early decades of their careers, particularly in their 20s and 30s, but maybe into your 40s as well. Let’s look at a quick example.
If you’re in your 20s and were to become disabled today, $7,500 a month may seem like a great monthly benefit in this stage of life when you’re renting and adjusting to your first attending job. But 30 years from now, you may be trying to pay off a mortgage and have multiple kids you want to help put through college, all still on $7,500 while costs across the board (housing, tuition, food, etc.) have increased year after year.
If we stick with the average 2.8% CPI mentioned above for an example, if you were spending $7,500 a month when you were disabled, in 30 years you may need closer to $17,000 a month to maintain the same purchasing power and related lifestyle.Â
Can I add a COLA rider to an existing disability insurance policy?
You typically cannot add a COLA rider to an existing policy once it’s been issued. Disability insurance riders like the COLA rider are typically elected when initially selecting a policy and aren’t available as mid-policy additions.
Some group disability plans allow benefit changes during open enrollment and may offer an exception to this rule, but we always caution against relying solely on these group plans. The goal of a COLA rider is to help provide stability, and group plans often don’t offer enough coverage in benefit amount or in long-term protection since they typically aren’t portable.
Related PSG resources:
Conclusion
Disability insurance isn’t just about replacing your income; disability coverage helps provide financial stability over decades in a worst case scenario. A COLA rider can help ensure that your benefits keep pace with your expenses so that your future self isn’t forced to live on last year’s (or last decade’s) dollars. With the potential significant increases over time, a COLA rider can be a significant increase in how much your disability insurance policy costs. This is often more beneficial for younger physicians to consider versus physicians with only a few years to a decade left to work.
Additional disability insurance resources for physicians
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For residents, fellows & early career attendings:
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