One must consider the possibility of becoming disabled and the financial consequences a disability would bring. That is why one secures disability income protection. Now think of your age. A disability benefit that is issued today may allow you to maintain the standard of living that you are accustomed to, but what happens as time goes by, and you are still disabled? The answer is that the buying power of the disability benefit is eroding- or being reduced- by inflation.
The best way to guard against that eventuality is by adding a cost of living adjustment rider to your disability policy when you secure the coverage. A COLA rider is designed to annually adjust your monthly benefit when you are disabled to keep pace with inflation. Most companies offer a fixed 3% COLA rider, and some offer a 6% maximum. Other carriers tie the annual increase to the Consumer Price Index for Urban Consumers (CPI- U), and allow it to fluctuate annually from 1%-6% based on the annual fluctuations of the CPI-U.
As a rule of thumb, the younger one is, the more important this feature. For example, if one is under age 45, it is almost imperative to have the Cost of Living Adjustment Rider. It is recommended for those between the ages of 45 and 55. It is not as necessary for those over age 55, as they are closer to retirement, and the effect of inflation is diminished by the lesser number of years to retirement.
Imagine if you are 40 years old and you owned an individual disability insurance policy with a $5,000 monthly benefit. If you became disabled, this amount may be sufficient to meet your needs at first, but as inflation factors in as the years go by, your benefit provides less and less. The following illustrates an example of two people. One added the cost of living rider, and one did not. They each started with a $5,000 monthly benefit and became disabled at age 40.
Monthly Benefit* at age 40 45 50 55 60 65
With 6% COLA $5,000 $6,991 $8,954 $11,983 $16,036 $21,459
Without COLA $5,000 $5,000 $5,000 $5,000 $5,000 $5,000
As you can see, the difference is staggering. This is an area that you need to pay close attention to when securing your own disability insurance policy. Make sure you make the right decision for your needs.
* Comparison of potential monthly benefit with 6% Cost of Living Adjustment Rider and one without. The 6% COLA calculations assumes 6% increase in the CPI-U each year throughout entire period of disability.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 1355 Piccard Drive #380 Rockville, Maryland 20850. Securities products/services and advisory services are offered through PAS, a registered broker-dealer and investment advisor, (240) 683-9700. James Fegan, Financial Representative. The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian.
Financial Balance Group is not an affiliate or subsidiary of PAS or Guardian.
PAS is a member FINRA, SIPC.
Disability insurance Policy Forms 1400, 1500 or 1600 underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of The Guardian Life Insurance Company of America, New York, NY. This policy provides disability insurance only. It does not provide basic hospital, basic medical or major medical insurance as defined by the New York State Insurance Department. For policy forms 1400, 1500, or 1600, the expected benefit ratio is 50% (including NY 1400). For policy forms 1400-F, 1500-F, or 1600 F, the expected benefit ratio is 60% (NY only). The expected benefit ratio is the portion of future premiums that the company expects to return as benefits, when averaged over all people with these policy forms respectively. Product availability, provisions and features may vary from state to state.
The best way to guard against that eventuality is by adding a cost of living adjustment rider to your disability policy when you secure the coverage. A COLA rider is designed to annually adjust your monthly benefit when you are disabled to keep pace with inflation. Most companies offer a fixed 3% COLA rider, and some offer a 6% maximum. Other carriers tie the annual increase to the Consumer Price Index for Urban Consumers (CPI- U), and allow it to fluctuate annually from 1%-6% based on the annual fluctuations of the CPI-U.
As a rule of thumb, the younger one is, the more important this feature. For example, if one is under age 45, it is almost imperative to have the Cost of Living Adjustment Rider. It is recommended for those between the ages of 45 and 55. It is not as necessary for those over age 55, as they are closer to retirement, and the effect of inflation is diminished by the lesser number of years to retirement.
Imagine if you are 40 years old and you owned an individual disability insurance policy with a $5,000 monthly benefit. If you became disabled, this amount may be sufficient to meet your needs at first, but as inflation factors in as the years go by, your benefit provides less and less. The following illustrates an example of two people. One added the cost of living rider, and one did not. They each started with a $5,000 monthly benefit and became disabled at age 40.
Monthly Benefit* at age 40 45 50 55 60 65
With 6% COLA $5,000 $6,991 $8,954 $11,983 $16,036 $21,459
Without COLA $5,000 $5,000 $5,000 $5,000 $5,000 $5,000
As you can see, the difference is staggering. This is an area that you need to pay close attention to when securing your own disability insurance policy. Make sure you make the right decision for your needs.
* Comparison of potential monthly benefit with 6% Cost of Living Adjustment Rider and one without. The 6% COLA calculations assumes 6% increase in the CPI-U each year throughout entire period of disability.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 1355 Piccard Drive #380 Rockville, Maryland 20850. Securities products/services and advisory services are offered through PAS, a registered broker-dealer and investment advisor, (240) 683-9700. James Fegan, Financial Representative. The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian.
Financial Balance Group is not an affiliate or subsidiary of PAS or Guardian.
PAS is a member FINRA, SIPC.
Disability insurance Policy Forms 1400, 1500 or 1600 underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of The Guardian Life Insurance Company of America, New York, NY. This policy provides disability insurance only. It does not provide basic hospital, basic medical or major medical insurance as defined by the New York State Insurance Department. For policy forms 1400, 1500, or 1600, the expected benefit ratio is 50% (including NY 1400). For policy forms 1400-F, 1500-F, or 1600 F, the expected benefit ratio is 60% (NY only). The expected benefit ratio is the portion of future premiums that the company expects to return as benefits, when averaged over all people with these policy forms respectively. Product availability, provisions and features may vary from state to state.
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