What is a Cost of Living Rider?

A cost of living rider is something many insurance and financial experts recommend when you are purchasing life and/or total disability insurance. The rider itself doesn’t have a life of its own, and can only be an add-on to an already purchased plan. It rides with the plan you purchase and can’t be purchased on its own, hence its unusual name.

Essentially, what the cost of living rider allows you to do is to upgrade or purchase additional insurance to cover the rising cost of living. If you purchase a specific insurance that will pay an amount that seems great in today’s market, it has a basic problem. It won’t keep pace with cost of living, and what may seem like a great deal today can down the road be inadequate to your needs.

This is especially the case if you are permanently disabled, which some life and term life policies have provisions for. You may purchase insurance that would essentially cover your current salary after a disability. If you were not disabled, and had continued to work, it’s likely your salary would rise slightly with cost of living increases.

Many financial experts recommend that the cost of living rider is an especially important add-on if you are young. As you near retirement or end of life, the cost of a living rider can be less important, because though cost of living changes, it may not increase so dramatically that payout on your policy would make an appreciable difference, either if you become disabled, or if you plan to use a payout to support a surviving spouse.

You can see the perils of not having a cost of living rider if you’ve got three or more decades left of expected life span. Should you become disabled, the insurance you purchase will pay out on the amount agreed when you signed the policy. This could be much less than you need ten or twenty years from now, so it’s definitely worth checking out this option when you purchase life and/or disability insurance. You will not automatically be offered this option, so you should ask about the rider if the insurance broker does not mention it.

It’s also important to evaluate how the insurance company offering you a policy assesses cost of living. Some companies allow a flat fee increase of between three to six percent per year. Others offer adjustment of payout based on the Consumer Price Index (CPI). It is usually better to look for a policy that bases cost of living increases on the CPI, because a set rate of increase may still be lower than what it really costs to survive comfortably.

You will pay more to get a cost of living rider. Option to purchase greater amounts of coverage on a yearly basis can increase not only your initial premiums, but will also definitely increase later premiums to cover increased cost of living adjustments. If you purchase term life insurance, the rider may be written into your contract, raising your premiums from the onset, but not causing a yearly increase in premiums.