The Cost of Living Rider is a feature that you can purchase with several different forms of life insurance plans.
This benefit is meant to help you with the potential of future inflation. If you purchase the cost of living rider, your policy might increase in value as inflation increases. If you buy a life insurance policy and you pass away 20 years after purchasing that policy, inflation will have taken place during those 20 years which means that your family would only receive your original death benefit, not taking into account inflation.
But if you have this feature your family will receive more than just the face value of your policy because the insurance company takes into consideration inflation.
This type of policy relies upon a financial index to determine the amount of inflation that has taken place over a certain amount of time. Policies typically use the Consumer Price Index in order to determine the amount of inflation that has taken place.
This index measures the change in prices of different items that consumers purchase regularly in order to determine how severe inflation is.
What Does the Cost of Living Life Rider Cover?
Inflation can have a devastating impact on your purchasing power. It erodes the value of your money. The cost of living Rider adjusts the amount of total benefit you receive based on the inflation rate. Anyone who is looking to offset the financial Devastation that inflation can have would benefit greatly from taking out this feature.
What’s more, this feature is typically one that you could combine with other Riders especially the disability income Rider.
If you were to take out a whole life insurance policy with the disability income Rider, and you took out the cost of living Rider, you could fight inflation during the time that you receive disability income from your life insurance policy.
If you combined these to the monthly disability benefit that you were paid would never be less than the amount shown in your policy but it could be more based upon adjustments for inflation so that it’s centrally you receive the same value you need even if the cash amount is different.
Who is Eligible for the Cost of Living Life Rider?
Anyone who is considering a whole life insurance policy is eligible for this rider, assuming the life insurance company offers it.
Most companies require you to add this when you take out a new life insurance policy, though some may allow you to add it later to an existing policy for an additional fee.
This varies from company to company which is why you should research the requirements for each company you consider.
How Does the Cost of Living Rider Work?
Let’s assume that you purchased disability income riders that provide you with a total of $1,000 per month in disability benefits and you chose the cost-of-living rider to provide you with an annual adjustment based on the Consumer Price Index upwards of 7% annually.
If you were to become disabled and need to take advantage of your disability Rider, for the first year of your disability the Consumer Price Index might, for example, indicate that inflation increased by 5%. As a result of that, the monthly benefit you receive from your life insurance company would also increase by 5%. That means that during the second year of your disability your monthly benefit would be 105% of the amount that you had when you started, so the total you would receive would be $1,050 per month instead of $1,000 per month.
If, during the following year, the Consumer Price Index stated that inflation decreased by 1%, the third year of your disability you would receive your income amount based entirely on that change. So, if you had 105% between year 1 and year 2, and the economy saw deflation of 1%, the total you would receive for the third year would be 104%, the original 105% – 1%. So your monthly payout for the third year would be $1,040 per month.
If during the next year the amount of inflation decreased by an additional 6%, you would not see a severe drop in your monthly income. You cannot receive less than your original benefit amount even if the Consumer Price Index is negative. So, if your original policy stipulated that you received $1,000 per month, even if that Consumer Price Index total now sets you at 98%, you would still receive $1,000 per month as per your policy.
There are, as mentioned, upper limits associated with this benefit. If you had that upper limit of 7%, and inflation reached 8%, the maximum amount you could receive for your disability income would be $1,070 per month.
Who Is It Best For?
If you are going to consider a rider for disability income you should absolutely consider adding the cost of living Rider as well. This is something generally reserved for whole life insurance policies so you may find a company with flexible features built into longer-term policies.
The cost of this feature is going to vary based on the requirements of the Life Insurance Company of chosen, in particular, the maximum and minimum amounts that you are protected against.
If you choose to purchase this rider in conjunction with another Rider such as the disability income rider, the cost might be contingent upon the percentage of protection you are afforded against inflation.
A policy which pays out $1,000 per month and protects you against inflation upwards of 6% is going to cost less than a policy which pays out $1,000 per month and protect you against inflation upwards of 12%. Each company is different in terms of how they adjust for inflation and whether that amount can be adjusted specifically for another benefit such as the disability income or simply for your total death benefit afforded to your loved ones when you pass away.
Best Life Insurance Companies for the Cost of Living Rider
|Company||A.M. Best Rating|
|Ameritas (FLX Living Benefits Products)||A+|