disability insurance COLA rider

A dollar doesn’t go as far as it used to. High inflation rates have caused prices to surge.  While many economists have examined what this means for family budgets and retirees on fixed incomes, some people may be overlooking one key issue: the impact of inflation on disability insurance claims.

What Is Inflation?

Over time, the purchasing power of a dollar declines. You can see this in your own lifetime. Just think about how much a movie ticket cost when you were a child compared to how much it costs now. It’s not just luxury items, either. Food, housing, clothes – everything becomes more expensive.

The Consumer Price Index is commonly used to measure inflation. It measure the average change in prices paid by urban consumers.

The Recent Rise in Inflation

Some inflation is normal, but rapid inflation can cause economic problems. According to Investopedia, the Federal Reserve aims for an annual inflation rate of 2%. For a while, the U.S. was hovering right around this.

  • In 2017, inflation was 2.10%.
  • In 2018, inflation was 1.90%.
  • In 2019, inflation was 2.30%.
  • In 2020, inflation was 1.40%.

Then in 2021, inflation shot up to 7%. In 2022, inflation remained high at 6.50%. In 2023, inflation began to cool, but it was still high at 3.40%.

The Impact of Inflation

According to Fox 5 Atlanta, a TikTok user posted a video that showed the impact of recent inflation on his grocery costs. He found a Walmart order for enough groceries for himself from two years ago. The original cost was $126.67. Using the “Reorder All” feature, he learned that the current price for the same order is now $414.39.

That’s a massive increase, but even normal inflation can have a big impact over time. According to the U.S. Inflation Calculator, an item that cost $1.00 in 1924 would cost $18.37 in 2024.

We can also see the impact on wages. In 1974, the minimum wage in the U.S. was $2.00 an hour. Today, and not adjusted for inflation, that would be a pitiful amount. Wages have to rise to keep up with inflation. For people who are no longer earning an active income – such as retirees – this can be an issue.

For example, you might determine that you can comfortably live on $30,000 a year based on current costs. Based on this, you might create a retirement plan that provides $30,000 per year for you to live on. But what happens in 10 years, when the value of $30,000 has significantly decreased? Your original budget will no longer be sufficient, and the value of your savings and investments may erode over time. For a retirement plan to be successful, it needs to take inflation into account.

Inflation and Disability Insurance

Just like retirees, people who rely on disability insurance payments may find themselves falling farther and farther behind because of inflation. A monthly payment that seems adequate now may not be enough to keep up with rising rents, property taxes, energy costs, car expenses, clothing needs, and food costs.

If you were working, you could ask for a raise or look for a new job that offers better compensation – but what do you do if you’re unable to work and relying on disability insurance payments?

With some policies, you might be in a difficult position. However, if your policy has a cost-of-living adjustment, or COLA, rider, you’re in luck. With a COLA rider, your benefits can increase each year to keep up with inflation after you’ve been disabled for the period required within the policy terms – often 12 months.

The increase may be based on a predetermined amount, or it might be tied to an inflation index, such as the Consumer Price Index. Some policies offer simple COLA riders, while others offer a compound COLA rider. COLA adjustments are typically applied to both total and residual disabilities.

While this rider may seem expensive, it is a tool you can use to help clients’ DI policy benefits keep pace with inflation and it can be a smart policy addition in some circumstances. For example, if your client is purchasing the maximum coverage available and/or if they are young and have a long benefit period, the COLA rider can be particularly advantageous.

Talk to Your Clients

Right now, many people are worried about what inflation means for their financial stability. This is a good time to talk to your clients about disability insurance and COLA riders.

  • If your clients don’t have disability insurance, use the current inflation as a way to bring up the need for adequate coverage. Ask them how they would deal with inflation and rising costs if an illness or injury kept them from working.
  • If your clients are already interested in disability insurance, offer the COLA rider when it makes sense. If you have any questions, contact us. We can guide you on the best case design for your client.
  • Also, remind existing clients to take advantage of the Future Purchase Option when possible.


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