By Andy Borgia and D.K. Unger, Guest Writers
The last two years have seen inflation climb to levels not seen this century. The Consumer Price Index (CPI) was 8.6 in 2022, more than four times the average, and the CPI was 4.7 for 2021, more than twice the average. Now is the time to thoroughly examine the merits of the Cost-of-Living Adjustment Rider (COLA) available on individual disability insurance policies.
To review, the COLA rider is an optional rider that increases the base monthly benefit of a disability insurance policy. So far, so good, but let’s look deeper. This rider only becomes active once you have filed a claim and have been receiving benefits for 12 months. Each company is different in how much extra benefit they provide and the rules for how they calculate it, and an extra premium is charged to add the rider.
Should a COLA rider be added to your future or current disability insurance policy? If the insurance companies included this rider for no extra premium, the decision would be easy. Why would you not want your monthly benefit to keep pace with inflation? Unfortunately for the consumer, insurance companies are experts at assessing risk and levying the premium required to insure that risk. COLA is no different. In this guest post, we will study the costs of a COLA rider and the benefits, and we will provide the data for you to make an informed decision on whether that rider is worth it.
Comparing the COLA Rider from the Big 5 Disability Insurance Companies
For this study, we obtained illustrations from Ameritas, Guardian, MassMutual, Principal, and Standard for male and female rates at ages 30, 35, and 40 for various states. We used various medical specialties and occupational classes and illustrated a $5,000 per month benefit with a benefit period of age 67 and a 90-day elimination period. To make this as accurate as possible, we wanted to simulate the real-life everyday policies that physicians are requesting and obtaining, so we added enhanced residual/partial benefits. We also included a benefit increase rider or future insurability/increase option (FIO).
We ran these both with and without COLA to gauge the premium differences. We ran all illustrations with California rates and policy provisions and compared them against New York and Texas rates to make sure the cost differential was the same with all carriers, which we found to be true. We then reduced the monthly benefit for the policy with COLA to equal the premium of the $5,000 monthly benefit without COLA. Since each company has a different way to calculate how they pay the COLA increase, we used the following rider from each company for our study:
- Ameritas: 3% simple annually, regardless of CPI
- Guardian: 3% compounded annually, regardless of CPI
- MassMutual: 3% compounded annually, regardless of CPI
- Principal: Up to 3% compounded annually, depending on the performance of CPI. Negative or flat CPI will result in a 0% change, and anything above 3% will be capped at 3%.
- Standard: Up to 3% compounded annually, depending on the performance of CPI. Negative or flat CPI will result in a 0% change, and anything above 3% will be capped at 3%.
Since each age, gender, and specialty produced virtually the same percentage premium differential between premiums with and without COLA, we used a 35-year-old male invasive physician as our case study subject with California rates and level premiums. We then reduced the monthly benefit for the policy with COLA to equal the premium of the $5,000 monthly benefit without COLA, which resulted in the following:
** Based on equal premiums paid with and without COLA for each company; however, we did not adjust for the premium differences between companies.
The chart above illustrates the amount of monthly benefit received based on equal premiums paid for policies with and without the COLA rider. As you can see, one can start with a higher monthly benefit for the cost of adding a COLA rider.
We then used the following CPI-U chart, taken from the Federal Reserve Bank of Minneapolis.
From this chart, we took data from the last 23 years—which we felt would be the most pertinent—and averaged it out to 1.925%. With all carriers, the cap increase is 3% (some carriers offer a higher cap percentage, but for the purposes of our study, we only used the 3% cap premium), so for the six years that the CPI exceeded 3%, we only used 3% for the average calculation. As noted above, some carriers guarantee 3% while others follow the CPI, since that was the most a carrier would pay each year.
Our final calculation determines the number of years an insured will have to be on claim to receive equal total payments to someone without COLA who is also on claim. We assumed with each policy that benefits would be paid and ignored any differences in any other contractual provisions. We also did not take into consideration the time value of money that would make receiving the extra funds sooner much more valuable.
The chart above indicates the number of years a policyholder must be on claim for the total benefit received from the COLA policy to equal the total benefit received from the $5,000 per month policy without COLA, based on the average CPI of this century. Take note that if the average CPI is lower than 1.925%, equalization would take more time, and if the CPI average was higher, it would take less time.
The chart above illustrates how many years a policyholder would have to be disabled before a lower monthly benefit policy with COLA would equal a higher monthly benefit policy without COLA.
Since the premium expenditure is equal, each physician should determine if they want the additional benefits immediately upon claim or deferred in the future. Our claims experience points to higher benefits sooner when the shock of lower income is greater than later when an individual has had time to plan and adjust for lower income.
More information here:
A Pain in the Butt – My Dental Disability Story
A Million Dollar Mistake – Disability Insurance Is Another Consideration When Selling Your Practice
Is a COLA Rider Worth the Cost?
Based on our research above, it is preferable to increase the monthly benefit in lieu of adding a COLA rider. This is especially true in times of higher inflation because the majority of companies cap COLA benefit increases at 3%. A higher monthly cap is available with some companies; however, this would increase the disparity between the COLA and non-COLA monthly benefit.
A superior allocation of premium in most circumstances is to obtain a higher monthly benefit and pay the same premium as a policy with a lower monthly benefit and COLA. There are some instances when it may be advisable to obtain the maximum monthly benefit available and add the COLA rider, such as when a physician is in the military and has limited monthly benefits in relation to income.
A physician can always remove the COLA rider in the future and increase the monthly benefit at that time.
Do you have a COLA rider on your disability insurance policy? Have you had to use it before? What was the experience like? Do you think the COLA rider was worth it? Comment below!
[Editor's Note: Andy Borgia is the co-founder of DI4MDS with over 40 years of experience specializing in life and disability coverage for physicians. As a Chartered Life Underwriter, he has advised countless residents, fellows, and medical professionals nationwide. Being independent from insurance companies allows Andy to prioritize his clients' interests. He enjoys family time and studying disability insurance, and he is an active triathlete, cyclist, and traveler. Andy is a member of the National Association of Insurance and Financial Advisors and the Society of Financial Service Professionals.
D.K. Unger is a highly experienced disability insurance specialist, possessing 10 years of expertise in analyzing disability insurance policies. Operating independently, he strives to identify optimal plans that strike a balance between affordability and comprehensiveness. His staunch advocacy helps ensure favorable underwriting decisions. Central to his business philosophy is the unwavering commitment to prioritize each client's needs.
DI4MDS is a paid advertiser and a WCI Recommended Insurance Agent partner. However, this is not a sponsored post. This article was submitted and approved according to our Guest Post Policy.]
This is a very helpful article and the charts are fantastic. I am perhaps greedy in wishing for even more along those lines. Although the authors state that the numbers for females have the same % difference when comparing policies with vs without COLA, some of the data presented are in terms of $ (# of years chart) so it is not clear to me that those data maintain the same relative % relationships. Perhaps this is due to my lack of intuition around some of these numbers. Even if the male data are “representative” in terms of relative relationship (which is not clear for the above reason), it would still be preferable to present multiple examples because most people think in $, not %, and we know those are different. Further, it is just too, too depressing to see, everywhere, male presented as universal, which insurance firms do not believe! The one sentence explanation didn’t get my buy in.
What’s your question exactly Stephanie? Whether it’s also 11 years at Ameritas for women before you’re better off with a COLA than with the larger base benefit?
I was attempting to provide, in a kind and gentle way, some constructive feedback to a blog I think is totally awesome (maybe I succeeded, maybe not). This article, with some small tweaks, could have been written in a more inclusive way IMO. I’ll bet I’m not the only reader with that perspective.
Ahhhh… well thank you for the kind and gentle feedback.
This is the line you’re objecting to I think?
I couldn’t find anything else that I thought anyone could possibly object to so this must be it.
I learned this lesson after my first book generated lots of complaints that I had used the “universal he” pronouns. In the second book, I made every pronoun in the feminine and there were no complaints. We’ve since removed singular pronouns from all of the books. But the lesson I learned is that if it doesn’t matter, just use the female pronouns/data etc. Half the people will think you’re doing a fantastic job being inclusive and the other half won’t even notice or care.
I’m not sure these two insurance agents/guest posters have had the opportunity to learn lessons like that yet and our editorial team (including several professional women) didn’t notice it as being something likely to generate criticism.
Well now you’re emboldening me…so I’ll see if I can push you just a skoch more 🙂
Universally female promouns will not feel inclusive to readers who do not identify with gendered pronouns at all. In many instances, language can be rewritten so no pronoun is needed at all (and then truly your readers won’t notice).
Now, in discussing disability insurance specifically, there is no getting around that #’s are different based on sex. In that case, my suggestion is to present both female and male #’s so readers can see whichever interests them (most of us finance supernerds find both quite interesting!)
I would also caution the gender identification of an editor is not necessarily informative as to whether they observe these sorts of issues. Illustrative example: when my spouse needed surgery a few years ago, nearly every administrator, schedulder, and assistant I spoke with about various appointments, tests, etc was female. All of them referred to my spouse’s female endocrinologist as “he” as in “he needs to submit an order for this test.” (omg…the doctor was a woman!!) This gender stuff is the water we swim in, hard for all us fish to see it clearly.
With this particular post, the reason for not posting both was because, as the authors stated, there was no significant difference in the relationships being examined for the post.
I agree that the current trend is no pronouns at all (thus why we’ve rewritten the books that way.) But even that will likely attract criticism for being too woke.
Thank you for your comments, I assure you that was not our intent at all, it was simply a mathematical comparison utilizing the same premiums and methods that insurance companies utilize to establish rates. Since the numbers are consistent we selected one at random in order to keep our post as concise as possible while still delivering an accurate analysis of the subject matter.
Sincerely,
Andy Borgia
Stephanie,
Truly appreciate your comments and prospective. We were only trying to present an impartial comparison utilizing the same math and variables that the insurance companies use. Age, specialty, state, policy provisions, riders and yes, gender. And tried to make the comparison as neutral as possible with no bias. Nothing else
Based on your insightful analysis of the COLA Rider, I’m curious to ask another important question – at what level of wealth or income should one consider self-insuring and potentially forgo disability insurance altogether?
If a person’s wealth or income is so substantial that the potential disability benefit becomes insignificant in comparison, they may choose to self-insure.
At financial independence, i.e. when you no longer have to work for money.
Dual professional couples will also sometimes consider each other to be their disability (and life) insurance. That has its limits, as both can be disabled and certainly mom and dad can both die at once in a car accident.
Exactly. When we reached $10M, I realized it was superfluous to have disability or life insurance. Wealth begets more wealth; no more annual premiums, and a lot less paperwork and fewer policies of which to keep track.
Others may understandably think it a bad decision, but with $103k in an HSA, premiums rising much more than inflation, and our rare need for medical care, we are self insuring for health insurance as well.
Thanks for this fantastic article. You cover key issues that others don’t even know exist.
I’m not sure $10M is even enough to self-insure health care. I interviewed someone for the podcast who is on a med that is $17K a month. It’s easy to spend 7 figures on cancer.
The other problem with not using a health insurance company is that now you’re subject to the chargemaster prices.
I know people who think that it’s reasonable as a dual professional couple to “cover” or insure each other, but I push back on this . There a few ways this can fail:
1) both become disabled
2) divorce
3) higher income partner has a disability that requires large expenses not covered by health insurance
We can pretend that these things never happen, but since this is a topic on protecting yourself for financially catastrophic events, dual high income couples should AT LEAST consider the above.
Regards,
Psy-FI MD
Yes. There are risks. But you’re paying full price to cover perhaps 10% of the risk. Hard to get excited about doing that.
It’s hard to get excited about covering any bad event from happening (sorry insurance agent friends), but that doesn’t mean we shouldn’t.
2 high income professionals should be able to shoulder the cost of dual disability insurances and still reach financial independence in a reasonable amount of time. Then they can get rid of them!
10% of the risk of near complete financial catastrophe? Doesn’t sound so crazy to me to at least think about covering that (esp on a dual high income salary).
Regards,
Psy-FI MD
Makes me want to go back in time and get rid of the COLA and just do a higher monthly benefit. Great article for anyone looking at new or additional disability.
My Ameritas policy had a 6% COLA compounded annually. I purchased it in 2016. Interesting if they’ve cut back on this benefit drastically to now only 3% COLA with simple compounding. I bought it as a resident to increase my maximum disability benefit from the $5000/mo they would offer to $5000/mo + 6% COLA and it was a good deal at the time.