Massachusetts Health & Accident Insurance Practice Exam

What is the purpose of a Cost of Living Rider in a policy?

1. To restrict payouts based on financial status

2. To adjust benefits according to inflation

3. To provide additional coverage for emergencies

4. To lower premiums over time

The correct answer is: To adjust benefits according to inflation

A Cost of Living Rider serves the important purpose of adjusting benefits according to inflation. This rider is particularly beneficial in situations where expenses may increase over time due to rising costs in the economy. When a policy includes a Cost of Living Rider, it ensures that the benefits provided, such as disability income or life insurance payouts, will increase in line with the Consumer Price Index or another measure of inflation. This helps policyholders maintain their purchasing power and ensures that the coverage remains relevant and effective over the years, despite inflation-related financial pressures. In contrast, the other options highlight aspects that are not typically covered by a Cost of Living Rider. Restricting payouts based on financial status does not align with the primary intent of this rider. Providing additional coverage for emergencies focuses on different features of insurance policies altogether. Lowering premiums over time is generally not the purpose of such a rider, as it is designed to keep benefits in line with economic changes rather than to reduce costs. Thus, the correct answer emphasizes the rider's role in adapting benefits to ongoing economic conditions to provide lasting financial security.