What is cost of living adjustment (COLA)? This question was posed to Mark Webb, Executive Vice President, Governmental Relations, of Employers Direct Insurance Company. Says Webb, "Some long term disability...
This question was posed to Mark Webb, Executive Vice President, Governmental Relations, of Employers Direct Insurance Company. Says Webb, "Some long term disability (LTD) policies, whether a group coverage from your employer or through an association or an individual policy you purchase, will have a cost of living adjustment (COLA) applied to benefits. This may be either part of the basic coverage available to you or, more often, an optional coverage that you can purchase. The adjustment is usually made annually after the first year of benefits have been paid. Since LTD benefits are intended to replace income that is lost due to disability, a COLA is an important additional benefit to consider if your employer sponsored plan does not already provide for one. Unlike an indexed benefit, such as in state workers' compensation programs or Social Security benefits, the COLA in a disability policy is a fixed percentage that is stated at the inception of the policy or is tied to the Consumer Price Index (CPI) up to a stated maximum, oftentimes 3 percent."
"Government disability programs, such as workers' compensation and Social Security, provide cost of living adjustments that are tied to an index without limitations. In the case of workers' compensation temporary disability benefits, that index is usually the increase in statewide average weekly wages (SAWW). Temporary disability benefits are intended to replace wages during the time that an individual is recovering from an accident or an injury arising out of and in the course of employment. In the case of Social Security, it is the Consumer Price Index for wage earners (CPI-W). In the case of workers' compensation benefits, the adjustment sets the amount of benefits that are paid based upon the date of the injury. If the injury lasts beyond one year, however, the benefits are usually not adjusted upward. Permanent disability benefits are generally not adjusted unless, in some states, the injured worker is totally disabled. In the case of Social Security, however, disability payments are adjusted for the individual on an annual basis."
"If your employer sponsored LTD benefit does not have a COLA," Webb continues, "then you should consider buying an individual policy if you decide that the additional benefit of a COLA is important for your overall financial planning. A COLA will make your coverage more expensive, but if you need the benefits over an extended period of time the annual upward adjustment in payments may be worth the expense. As is the case with any purchase of private LTD insurance, take care to analyze all of the many variables that can increase the cost of LTD insurance and make certain your decision is made in light of all the other insurance, government program benefits, and private savings available to you in case of a long term injury or illness. For example, what could the effect of a COLA in your coverage be if you purchased a guaranteed renewable policy where the premium may increase after a period of time? These are the types of questions you should ask your financial planner, insurance agent, or insurance company representative. The absence of a COLA should not be the deciding factor in purchasing private LTD insurance, but it is one of the important factors to take into account when considering your LTD insurance needs."
