Inflation protection is an important feature to consider when searching for long-term disability insurance.
If you are disabled for a long period of time, inflation will affect the value of the benefits you receive. If you receive a set amount of money per month for you disability insurance, after several years, you may find yourself without enough money to cover the costs of living. Inflation affects everything in the economy with monetary value; thus, inflation protection is a valued commodity in disability insurance.
Over time, inflation causes the prices of everything in the economy to rise. You probably remember stories that your grandmother or even mother told you about how a loaf of bread cost 50 cents back in the day and a candy bar was a nickel. And you most likely remember just a few years ago when gas wasn’t more than a dollar. As the years go by, the prices go up because of inflation. The cost of living becomes more expensive, while at the same time, wages raise as well. In 1938, the federal hourly minimum wage was 25 cents; in 1956, it was 1 dollar; in 1978, it was $2.65; in 1990, it was $3.80; and in 1997, it was and still is today $5.15. (Many states have their own minimum wage that is higher than $5.15.)
How would inflation affect you as a disabled person? For example, pretend that at the age of 55, you become seriously disabled and are unable to work. You have disability insurance and begin to receive $1,000 per month as the benefit for your disability insurance. Let’s say you are able to just barely live on this amount of money. Every month, you pay for your place of residence, food, clothing, medication, travel, and anything else that you need. In as few as 5 to 10 years later, if you are still disabled, because of inflation, you may not be able to live off of $1,000. The price of rent will have gone up, food will have gone up-the entire economy has become more expensive. You may now require $1,400 a month in order to pay all of your expenses. Without inflation protection, you would still only receive the $1,000 that was part of the original policy.
However, most policies offer an inflation protection or a cost of living agreement. Inflation protection will allow an increase in benefit levels at an annual rate of no less than 5 percent, or it will guarantee that you have the right to purchase additional coverage during specific periods.
This inflation protection helps maintain purchasing power of benefits throughout your disability. For some long-term disability insurance plans, you may be offered the inflation protection feature every 2 years so that you can keep pace with inflation. You can choose to reject the increase if you decide to.
If you choose to accept inflation protection, your premiums will go up, but the value of your improved coverage will likely offset this cost and the cost of higher living in the future. It can get costly, though, because you will need to purchase an inflation protection “rider” on top of the base policy. And then once your disability begins, with some policies the first rider may become inactive, and you may need to purchase a second rider to keep up with inflation throughout the disability.
There are basically three types of inflation protection that can be purchased with long-term disability insurance: simple inflation, compound inflation, and guaranteed purchase options. Compound inflation protection is the most reliable for keeping up with rising costs. Guaranteed purchasing options offer you the opportunity to purchase additional coverage each year. However, the new premium may be based on your current age rather than the age that you originally bought the policy. The additional premium required to keep up with inflation may be prohibitive.