Most of us understand that the value of a dollar changes over time due to inflation and the evolving cost of living. However, when you’re considering your disability insurance options, you might not assess how far your monthly benefit will go in five to ten years. What may seem like an adequate recovery may quickly become insufficient as the cost of living rises.
Disability policyholders concerned about the sufficiency of their coverage over an extended period can purchase a supplemental cost-of-living adjustment (COLA) rider that will result in a steady increase in their benefits as time passes.
Keep reading to learn more about COLA riders and how they might affect your long-term disability (LTD) benefits.
As the Cost of Living Increases, Your LTD Benefits May Become Inadequate
In 2000, the average cost of a gallon of milk was $2.79. In 2020, it was $3.53 per gallon. While this may seem like a minor expense, inflation tends to push the prices of everything steadily up. From groceries to the cost of housing, vehicles, and medical care, you can assume that everything will cost more over time.
Unfortunately, unless you have a COLA rider in your LTD insurance policy, your monthly benefit will not change with the times. While your monthly check may seem more than sufficient early on, inflation can quickly erode its value. A cost-of-living adjustment rider, an add-on to your LTD insurance policy, allows for incremental increases to help maintain your quality of life and financial security.
Cost-of-Living Adjustments and Disability Insurance
COLA riders can have various terms and conditions, and the options you choose will impact the policy’s monthly premiums. However, you should never base your disability insurance rider choices solely on their price. Instead, you should evaluate how the rider might impact your financial security in the years to come.
Every insurer has different offerings, but certain shared features are typical of many disability insurer offerings, particularly for COLA riders. COLA riders can be broken down into different types.
- Fixed COLA: Fixed increases are pegged at a specific percentage (for example, 3%) and typically apply annually on the anniversary of the policyholder’s disability. Suppose you became disabled on June 1, 2020, and your monthly disability payment is $2,000. With a 3% fixed cost-of-living adjustment, your benefit payment would go up to $2,060 on June 1, 2021.
- Indexed COLA: Indexed cost-of-living increases are pegged at a third-party index, such as the Consumer Price Index (CPI). The CPI tracks average prices of everyday consumer goods, like food and medical care, to gauge inflation. Indexed COLA riders may have a minimum that is lower than the fixed alternative but may have a maximum that goes higher if the third-party index skyrockets.
- Simple Interest: Simple-interest COLA riders apply the cost-of-living adjustment to the principal disability benefit amount every year. For example, if you receive $20,000 per year in disability benefits, then a simple interest COLA rider with a three percent fixed rate would increase that benefit amount by $600 every year.
- Compound Interest: Compound-interest COLA riders apply the cost-of-living adjustment to the accumulated benefit amount. For example, if you receive $20,000 per year in disability benefits, then a compound interest COLA rider with a 3% fixed rate would increase that benefit amount by $600 in the first year, then $618 in the second year, and so on until the termination of benefits.
If you need help understanding your rider’s specific terms and conditions, contact our disability insurance lawyers for assistance. We can help you determine whether a particular policy’s language will protect your long-term financial interests.
RELATED: Are Short- and Long-Term Disability Benefits Taxable?
Is the Insurance Company Misinterpreting Your COLA Rider?
Sometimes, insurance companies misrepresent the terms of their insured’s COLA riders, hoping that you’ll accept less in monthly benefits than you’re actually owed. You should look out for these common issues that arise with LTD cost-of-living adjustments.
- Ambiguous Rider Language: Insurance contracts and riders are often written in ways that are fundamentally ambiguous, and some adjusters will try to use vague language or loopholes to reduce your cost-of-living adjustment.
- Agent’s Misrepresentations: Sometimes, insurance agents will make vague or misleading statements when they’re trying to close a deal. You may believe that you purchased a specific type of rider or coverage, only to discover that the policy has different terms and conditions.
- Calculation Errors: Insurance company representatives sometimes miscalculate cost-of-living adjustments, either intentionally or due to honest mathematical errors.
For example, an insurance agent might make statements that lead you to believe that you have a compound interest COLA rider. However, once you start receiving LTD benefits, you discover that you’ll only get simple interest increases. In this case, you should immediately consult with an experienced LTD lawyer; you might have a bad faith insurance claim based on the agent’s misstatements.
Sometimes, insurance companies misrepresent the terms of their insured’s COLA riders, hoping that you’ll accept less in monthly benefits than you’re actually owed.
When these issues arise, it’s best to consult with an experienced LTD lawyer. You may have the right to additional compensation or other legal recourse.
It’s also worth noting that under Illinois insurance law, courts must interpret any genuine ambiguities in a disability insurance contract in a manner favorable to the policyholder’s interests.
Bryant Legal Group: Chicago’s Trusted Disability Insurance Firm
Bryant Legal Group is a Chicago disability insurance litigation firm with extensive experience handling COLA rider claims. We take a practical, client-centered approach and serve disabled professionals across Chicago and Illinois. If you’ve had your disability benefits claim wrongfully denied or mishandled by your insurance carrier, or if you’re simply considering filing a claim, we can help you understand your legal options.
To schedule an initial consultation, call us at 312-561-3010 or complete our online form.