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(00:29): Today's episode of the cover, your assets podcast. This is Billy. Gwaltney your host, and I'm happy to be with you today. Today, we're going to talk about the cost of living adjustment rider or Cola rider, and the calculation that each of the top specialty disability companies uses to determine how much the Cola will impact the policy. And so I get this question a lot. Does the Cola calculation matter? And most of our clients are young physicians. When we start working with them still in training, typically, you know, late twenties, early thirties, we serve them throughout their career. And as they are thinking about coverage, one thing they want to know about is, is the Cola. And is it important? How do they calculate it? How does it work? So we'll talk about this in particular, regarding the calculation, the cost of living adjustment.
(01:20): Again, the Cola rider is designed to be an inflation hedge on your policy. That would keep pace with inflation if you become disabled. So what it does is at the time of claim, whatever your policy benefit is, let's say is 5,000 per month, they would pay 5,000 per month for the first 12 months of the policy. And then in the 13th month or second year, they would bump it up by whatever the percentage that's applicable to the Kohler rider you have on your policy, 3%, 6%, whatever it is generally, you know, if you're disabled in your thirties and you're going to collect for 10 years or longer, or say, you know, to age 65 or 67 or 70, whatever your benefit period is, you would likely be glad that there was a Cola rider or inflation hedge on the policy. But that said, it's not required.
(02:13): You do pay an extra fee up front for it. And it, again, the Cola kicks in at the time of claim. It's not an increase while you're working. It's an increase once you're disabled. And so you pay for it upfront. It doesn't activate until the disability occurs. Now, each of the top specialty companies has different ways that they calculate the Cola. For example, two of the top companies have like a fixed 3% that they compound. So their Cola's going to increase by 3% each year, it's going to compound on itself. So each year it's adding 3% of the previous year's full amount. A one company does a 3% simple and that's going to be a flat 3% and it's going to increase by that same amount each year. So if you had 5,000, it would go to 51 50 per month and then 5,300 per month, and then 54 50 per month.
(03:06): And it would just keep going that way. It's not going to compound on itself. There are different ways and options that you can pick from the, some of these options are a floating Cola, a adjustment say from zero to 3% or zero to 6%. And it's based on the consumer price index or the CPI, which is the, the U S national gauge of inflation. These would typically compound on compound interest on themselves and they, it would also fluctuate. So, you know, as, as inflation fluctuates, your Cola adjustment is going to fluctuate. Again, some are fixed some float it just depends. Each company has their own way of determining what this would be. The point in the cost of living adjustment is to keep pace with inflation. And this is likely to happen with most, if not all of the Cola options that are available the, as an FYI, the ones that go from say zero to 6%, have a higher fee associated with them than the ones that go from zero to 3%.
(04:15): The 6% fixed is gonna have a higher fee than the 3% fixed. And so the lower, the Cola adjustment, the lower the Cola fee. And so there are generally two ranges that each company has like in the zero to 3% range or 3% fixed. And then in the zero to 6% range or 6% fixed again, each contract is different. You would want to look at these details before you purchase. The point is the kind of circle back to the original question, does the calculation matter? Of course it does matter something you want to know, but I think it's important to keep the main point. The main point, the main point is to keep pace with inflation and all of these is these calculations typically have done that. Historically, of course, we could end up in a raging inflation scenario at some point in the future, who knows.
(05:06): And so the higher the range, the more benefit you would have from that, I typically advise clients when they ask about the Cola option and does the calculation matter. I advise them not to pick a company primarily because of how the Cola rider is calculated, or the benefit is calculated. It's more secondary. The other definitions and features of a particular contract would likely need to take precedence. And then the Cola calculation can be added on, but generally you wouldn't want to just pick a company because they have a great Cola, because if their definitions are not what they should be, then, then it's not going to matter what the Cola is. Now, again, among the top companies, if you're working with a specialist and you're getting coverage design correctly, then you'll have those definitions there and then you can pick the colo. But again, the point is to keep pace with inflation, which typically these have done and hopefully will do. I hope you found this helpful would be happy to discuss your situation in more detail. Anytime, my number is 7 0 4 2 7 0 2 3 7 6. And again, that's 7 0 4 2 7 0 2 3 7 6. I'd be happy to chat with you until we meet again. This is Billy Gwaltney. Thank you as always.
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