The cost of living rider is a rider to life insurance or disability insurance which counterbalances and keeps up the value of the policy at par with the cost of living. This means that as time progresses and the value of money drops (inevitably) the insurance adjusts to the rising cost of living. This is done by adjusting the face value of the policy and usually in term insurances.

• The policy is upgraded so that the face value matches with the changes in Consumer price index (CPI). The consumer price index is a tool to measure changes in the cost of basic services or commodities in comparison with a fixed base period. This is also called the cost of living index. This essentially means that the value of the policy will not decrease over a period of time and does not get redundant due to the drop in the value of currency.
• The cost of living rider is usually not a part of the policy and has to be bought separately; as is the case with any rider in any insurance policy. The advantage of buying such a rider is apparent since it will help the policy holder and the beneficiaries to maintain the same standard of living if its time for payout.
• Such insurance policies are available for people with permanent disabilities and insurance can be purchased (term or life) which may provide you with the salary that you drew before being disabled. However this means that the salary should increase as would have been the case if you were not disabled. The cost of living rider ensures that it does increase even if you are disabled.
• The cost of living rider can only be recommended to people who are young since the time taken for money to devalue is not short. What this means is that an old person who takes out senior life insurance will not benefit from the rider since the chances of dying increase as we get older. This in turn means that the cost of living will not change much within five or ten years. This is not the case when you are young when a policy for 30 years needs to be topped up with this rider in order to keep up with the cost of living.
• The dangers of not having a cost of living rider are apparent since it is almost certain that after thirty years the value of a dollar will not remain the same and will decrease. The catch for such life insurance riders is that the cost of the insurance can be more. It is a good idea to ask about the cost and other features of such riders when you contact the insurance company or the broker.
• Some insurance companies may use other methods of compensating for the increase in the cost of living by using a flat increase in terms of percentages on an annual basis. This means that they do not use the Consumer Price Index and only add a certain percentage to the face value of the policy on an annual basis. The better option among these would be the Consumer Price Index based increase since it is more accurate.

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