How to Insure Your Income: Cost of Living Benefit

The purchasing power of fixed disability benefits may be eroded due to inflation and increases in the cost of living. To protect against this, most insurance companies will offer an optional cost of living benefit.

Under this option, your monthly disability benefit will be increased automatically as needed, once you are on claim. Typically, this increase will occur after you are on claim for 12 months, and each 12-month period thereafter, as long as you remain on claim.

Also, many insurers will permit a person to buy back the additional monthly benefit when coming off claim. This means the policyholder's available disability benefit will be increased to include cost of living adjustments -- and the premium charged will be increased to reflect the bigger benefit.

Example: Lucy has a disability income policy with a $1,000 monthly benefit and a cost of living benefit. She's totally disabled for five years. During that time, she gets a $200 a month increase in her disability benefit. Eventually, she recovers from her disability and can return to work. When she does, she can pay a slightly higher disability premium and keep the extra $200 a month in force.

Without this provision, once you're off claim, the total benefit reverts back to the original amount.