Cost of Living Adjustment (COLA)

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Cost of Living Adjustment (COLA) cost of living adjustment (COLA) is an increase in the amount of money that someone receives in order to keep up with the rising cost of living. COLAs are typically given to people who receive fixed incomes, such as Social Security benefits, pensions, and annuities The COLA rider is an optional benefit designed to help your disability insurance benefit keep pace with inflation. These riders generally adjust your policy's monthly benefit on an annual basis, based on a fixed percentage or tied to the consumer price index after you have been disabled for 12 months. The amount of a COLA is typically based on the percentage increase in the CPI from one year to the next. For example, if the CPI increases by 2% from one year to the next, then Social Security benefits will increase by 2%. To see how this COLA design might work for any client, let's consider an example. Suppose that our client purchased a disability income insurance policy with a $1,000 per month total disability benefit and a COLA rider providing an annual adjustment based on the Consumer Price Index For All Urban Consumers (CPI-U) up to a maximum of 7% yearly. Let's further suppose that during the first year of disability, the CPI indicated that inflation grew by 5%. As a result of that inflation growth, our client's monthly benefit will grow by 5%. Therefore, in the second year of disability, the client's monthly benefit is 105% of the amount at which it began, or $1,050. ($1,000 x 1.05 = $1,050) But, what if, in the next year, the CPI-U is a minus 1% as the economy experienced deflation? The benefit payable in the third year of disability would then reduce under most COLA riders that are based solely on the CPI. The total change in the CPI after the onset of disability is 104% since the change in the CPI was plus 5% in the first year and minus 1% in the second year. As a result, the benefit payable in year 3 is 104% of the initial $1,000 or $1,040. #benewinsurance #insurtech #inclusiveinsurance #insurance #reinsurance #takaful

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