The Insurance Buying Guide: 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 these trends, most insurance companies will offer an optional cost of living benefit.

Under this option, your monthly disability benefit automatically will be increased 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.

Once you're off claim, the total disability benefit reverts back to the original amount.

Many insurance companies will permit a person to buy back the additional monthly benefit when coming off claim. This means your available disability benefit will be increased to include the cost of living adjustments -- and the premium charged will be increased to reflect the bigger benefit.

For 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 and gets a 5 percent cost of living increase each year. During her time on claim, she gets a $200 per 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.

If you buy back a cost of living increase, the additional premium will be based on your age at the time of the buy back.