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Trevor Tarpinian, CEPA®
Licensed Insurance Counselor
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trevor@tfi4insurance.com

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Disability Income Insurance 101 - COLA

The Cost of Living Adjustment (COLA) is a post-claim feature that increases your benefit each year to keep up with inflation. This feature is an add-on you purchase onto your disability income policy. It is a pre-agreed percentage of the monthly benefit, and most companies offer COLA options between 3-6%. Cost of COLA runs about $20/month on a 28-year old with $5,000 of monthly benefit and about $40/month on a 45-year-old, but I've seen it as low as $17/month for the same coverage on a 40-year old.

How does Cola Work? Let's assume you have a monthly benefit of $5,000. If you're unsure what the monthly benefit is, check out my other contribution in the Disability 101 series here. Now let's say you become disabled and become eligible for disability benefits on your disability income policy. If it has some type of COLA, the monthly benefit will increase by x% annually. The intention is to keep up with inflation. This can be a powerful add-on to your policy at a relatively small cost, depending on your age and financial situation. But allow me to make an assertion that you'll pick up on as you see the illustrations below: COLA has more value the younger you are. Let me show you 3 examples. All examples will assume the policy in question has a monthly benefit of $5,000, an age-65 benefit period and any COLA will assume a 3% rate of increase.   

If a 35-year-old became permanently disabled, annual disability benefit would begin at $60,000 for the first year. Without COLA, it would remain $60,000 every year through age 65. The total benefit paid would be $1,860,000 ($5,000 x 12 x 31). With the COLA in place, the $60,000 of annual benefit would increase to $65,564 at age 38, then keep increasing 3% each year. It would be up to $88,112 at age 48, and 108,367 at age 55. The total benefit paid would be $3,000,161 ($60,000[1+.03]31). That's a $1,140,161 difference for the 35-year-old that is permanently disabled. FYI - COLA costs approximately $22/month for 30-year-old with a $5,000 monthly benefit.



If a 45-year-old became permanently disabled, annual disability benefit would begin at $60,000 for the first year. Without COLA, it would remain $60,000 every year through age 65. The total benefit paid would be $1,260,000 ($5,000 x 12 x 31). With the COLA in place, the $60,000 of annual benefit would increase to $65,564 at age 48, then keep increasing each year. It would be up to $88,112 at age 58, and 108,367 at age 65. The total benefit paid would be $1,720,589 ($60,000[1+.03]21). That's a $460,589 difference for the 45-year-old that is permanently disabled.  



If a 55-year-old became permanently disabled, the annual disability benefit would begin at $60,000 for the first year. Without COLA, it would remain $60,000 every year through age 65. The total benefit paid would be $660,000 ($5,000 x 12 x 11). With the COLA in place, the $60,000 of annual benefit would increase to $69,556 at age 60, and increase to $80,635 at age 65. The total benefit paid would be $768,468 ($60,000[1+.03]11). That's a $108,468 difference for the 55-year-old that is permanently disabled. If you're only paying the $20/month for the COLA because you locked in premium rates as a 28-year-old, this may still be an advantageous feature to you. However, if you're applying for new coverage in your 50s, the cost of the COLA may outweigh the benefits.

Practical Application: If you are in your late 50s and have COLA still on your policy, it may be worthwhile to calculate whether the premium is worth the added benefit. I just worked with a client on this and, based on their age, the COLA doesn't have enough time to compound and really make a big difference. The client opted to remove the COLA at this stage in their game and divert the premium money toward other goals. - If you purchased coverage and had a medical condition excluded, you may not have been offered COLA on your policy. Contact me and I can help you identify if you have it or not. You may be eligible to obtain it. - If you're in your 20s, this is the wisest time purchase the COLA because the coverage will be the least expensive in your life. You could benefit in your 40s and 50s from the rates you locked in now, and you have the most working years to lose to a disability. The COLA's benefit is more powerful the younger you are. Send me a message and I can help you review your current coverage and COLA options.

Click the "Contact Us" button, send me a message, and I can show you how to increase your current monthly benefit.

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