California Life-Only & Accident and Health AgentLife InsuranceMedium
A life insurance policy includes a Cost of Living Adjustment (COLA) rider. If the Consumer Price Index (CPI) increases by 3% in a given year, how would this typically affect the policy's death benefit and premiums?
- ABoth the death benefit and premiums would remain unchanged.
- BThe death benefit would increase by 3%, and premiums would increase proportionally.
- CThe death benefit would decrease by 3%, and premiums would remain level.
- DThe death benefit would increase by 3%, and premiums would decrease.
Show answer & explanationAnswer & explanation
Correct answer: B. The death benefit would increase by 3%, and premiums would increase proportionally.
A COLA rider allows the death benefit to increase periodically to keep pace with inflation, typically tied to the CPI. To maintain the actuarial soundness of the policy for the increased coverage, the premiums will also increase proportionally.
Why the other options are wrong
- A. Both would change with a COLA rider and CPI increase.
- C. Death benefits increase with COLA, not decrease.
- D. Premiums increase with increased coverage, they do not decrease.
Cost of Living Adjustment (COLA) Rider
A rider in a life insurance policy that automatically increases the death benefit (and typically the premium) periodically to offset inflation, usually based on an index like the Consumer Price Index (CPI).
- Increases death benefit due to inflation
- Usually tied to CPI
- Premiums also increase proportionally
- Helps maintain purchasing power of death benefit
Memory trick: Riders are 'add-ons' that enhance your policy's protection.