Disability Insurance COLA RiderInflation is on the rise. While many economists are talking about what this might mean for current wages, daily costs and even retirement plans, some people may be overlooking one key issue: the impact on 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. According to BLS, the U.S. City Average increase was 1.4% in 2020. In 2019, it was 2.3%, and in 2018, it was 1.9%.

The Current Rise in Inflation

Inflation has hit its highest level in 13 years, according to The Wall Street Journal. In May 2021, consumer prices were up 5% compared to just one year earlier. Some items are seeing even higher price increases. Used cars, for example, increased 7.3% from the previous month.

The Impact of Inflation

Although the impact of inflation can seem small from day to day, over decades, it can have a tremendous impact on the value of a dollar. According to the U.S. Inflation Calculator, an item that costs $1.00 in 2021 might have cost $0.07 one hundred years ago.

We can see the impact on wages. In 1971, the minimum wage in the U.S. was $1.60 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 become 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 the high rate of inflation will mean 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, talk to our sales team. 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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