The Amber Stitt Show

Physician's Edition: What is a COLA Rider? Learn How it Works and If You Should Buy One

March 08, 2022 Amber Stitt
The Amber Stitt Show
Physician's Edition: What is a COLA Rider? Learn How it Works and If You Should Buy One
Show Notes Transcript

In this Physician Edition episode, Scott and I discuss how the "COLA" Cost of Living Adjustment Rider works so you can decide whether or not you would prefer this on your contract. 

We are specifically focusing on Own Occupation/Specialty disability insurance contracts here when we discuss the need for the value per person. *Other financial products may require a different viewpoint.*

Not all COLA riders are made the same. 

-Some are 3% simple interest (Ameritas and OhioNational have this)
-Some are 3% compounding interest (Guardian, MassMutual and Standard have this)
-Some are 6% compounding interest (some let you select this if you want to)
-Some are floating 0-3% compounding interest (Principal is compounding but floats)
-Some are 0-6% or 2-6% compounding interest (Ameritas and OhioNational have this version)

NOTE: This podcast was transcribed by a free AI transcription tool called Otter. Please forgive any typos or errors.

Hello, in today's Physician Edition episode, we are covering COLA. This is the Cost of Living Adjustment rider, the "Inflation" rider. This will explain how it works and will help you decide whether or not you should buy one for yourself. I hope you enjoy it.

This is Amber and Scott covering cola riders which also known as an inflation rider, we're going to cover how this works and why you may or may not want it.

COLA is an interesting feature that you can buy on a policy that doesn't come to play until the 13th month on claim. A lot of people buy a COLA contract and think that 10 years from now you while healthy and well that COLA is just growing your benefits, but it doesn't work like that

So if you don't have a claim, and you know, nine years later, you have a claim your benefit is still exactly what it was. Cola doesn't kick in until one year on claim in the month following and then it starts to trend typically at the inflation rate of the prior 12 months not to exceed 3%.

And not all COLAs are built the same. So depending on the carrier, there are either simple interest Colas at 3% compounding, and then some float depending upon the CPI index. So that may or may not be important to you, but it's something that you would definitely want to look at, especially if you're adding a rider with cost to your contract.

Another thing that we get asked often about and I think mathematically, it's important to go through these as options are you need to be able to pay attention to what is my benefit capacity today. And if I took the same premium dollars, I was spending on Cola, and just applied it to buy more benefits, which one's going to do the most good for me and my family. Now, you know, it takes a little bit of mathematical extrapolation to get to these numbers. But the reality is, if a cost of living is costing between on policy about 12, to about 22% of the entire premium, you know, one, one can understand how you could buy 12 to 22% more benefit. When you then take a look at how long a claim might last, does that cola have the ability to get the total benefit paid out, and then the cumulative benefits being paid out to be greater than if you just bought more benefit load. So you know, there's some math, science and emotion behind this decision. And you have to decide which discipline you want to look at.

Disability Insurance is essentially transferring risk. So some of our clients might put COLA on their contracts initially to get through a period of time, once they're meeting their goals for financial independence, we might recommend that they remove the rider off the policy, save their money, given that there are so many different ways that that cola may not perform, or you might not even use it. Well, I think

that, you know, when you look at the mathematics behind it, there's what I've tried to utilize is if I were to have a claim, and how many years on claim, does one have to be before the benefits being paid out are the same and then tell the cumulative benefits are the same. If those numbers are 1012 years, which they typically are sometimes even 14 to 16, that turns into a really, really long claim. Because you can then go to an insurance company, ask them how long does and what percentage of claims last 10 years or 12 years or 14 years. And now you're starting to understand the value of having just bought more benefit. So whenever we're looking at a cola, the first thing I always try to look at is what's the cost of that COLA rider. And if I took that extra money and just bought more benefit, how many years on claim, don't have to wait until that cola benefit, which is turning once a year on a bump up equals the benefit being paid out on the non COLA contract. And then how many years until the cumulative benefits the total money that one receives from a policy? How long will that take? Typically, when you're looking at a 3% cap COLA, realizing inflation has been running underneath that. It's usually between 10 to 12. And even sometimes 14 years. When you take that 14-year number and go back to the insurance company say how many claims have lasted 14 years, it's pretty few because a lot of people end up hitting age 65 or part of the 14 years they've passed away or they got better. And so, you know, if you're able to have an extra 12 to 22% of benefit day one. You could take that benefit and start to pay down debt, pay down debt and cash flow recapture that and becomes easier and easier to deliver on that. So it's not right for everybody to have gold, but it's certainly not right either. It all depends on your individual situation.

Thank you for joining us on today's episode of The Amber Stitt Show - Physician's Edition. For more information about this podcast books, articles and more, please visit me at For more information about physician insurance contracts, please listen to the entire physician edition podcast series or visit us at Thank you for listening!

Transcribed by

Thank you again for joining Scott and I, in this episode of The Physician's Edition. We will see you next time, podcasters!