Another rider that many people feel strongly about is the cost of living rider. It works fairly simply: Each year, the amount of death benefit increases based on some neutral statistic, usually the Consumer Price Index (CPI) put out by the federal government. If you choose this rider, the face value of your insurance policy automatically increases by this percentage.
For example:
If you have a $100,000 policy and the CPI is 3 percent, the coverage goes up 3 percent, to $103,000. The next year, when the CPI is 2.5 percent, your coverage rises 2.5 percent, to $105,575.
Naturally, you don’t get this additional benefit for free. Instead, either your premiums rise to pay for the additional coverage or, if you have a cash-value policy and your premium is constant, the insurance company reduces the amount that goes into your cash value. One of the benefits of a cost of living rider is that your coverage goes up without your having to requalify for a higher amount. That means no new medical exams later in life when you may not qualify.
In that regard, this rider can be a pretty good deal: Your insurance
coverage goes up to reflect the new needs of your survivors without your having to worry that you won’t qualify for the higher amount.
On the other hand, the amount of increased coverage can be pretty small. In the last several years, for example, the inflation rate has been quite low. Adding 2 or 3 percent is not likely to make much difference to your survivors. Secondly, with most policies you get to choose each year whether to purchase the higher amount. But if you decline in any one year, you no longer have the option in later years and have to requalify if you want to buy the rider again. If this rider appeals to you, chances are your concern is really more about the total protection you have purchased than the small yearly increases. Speak with your family, your financial advisor, and your insurance agent about these concerns. And if some event occurs in your life that warrants increasing your coverage — the birth of a child or a new job that results in a dramatic increase in the cost of your lifestyle, for example —buy a larger policy.
For example:
If you have a $100,000 policy and the CPI is 3 percent, the coverage goes up 3 percent, to $103,000. The next year, when the CPI is 2.5 percent, your coverage rises 2.5 percent, to $105,575.
Naturally, you don’t get this additional benefit for free. Instead, either your premiums rise to pay for the additional coverage or, if you have a cash-value policy and your premium is constant, the insurance company reduces the amount that goes into your cash value. One of the benefits of a cost of living rider is that your coverage goes up without your having to requalify for a higher amount. That means no new medical exams later in life when you may not qualify.
In that regard, this rider can be a pretty good deal: Your insurance
coverage goes up to reflect the new needs of your survivors without your having to worry that you won’t qualify for the higher amount.
On the other hand, the amount of increased coverage can be pretty small. In the last several years, for example, the inflation rate has been quite low. Adding 2 or 3 percent is not likely to make much difference to your survivors. Secondly, with most policies you get to choose each year whether to purchase the higher amount. But if you decline in any one year, you no longer have the option in later years and have to requalify if you want to buy the rider again. If this rider appeals to you, chances are your concern is really more about the total protection you have purchased than the small yearly increases. Speak with your family, your financial advisor, and your insurance agent about these concerns. And if some event occurs in your life that warrants increasing your coverage — the birth of a child or a new job that results in a dramatic increase in the cost of your lifestyle, for example —buy a larger policy.
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