South Carolina Life and Health Practice Exam

What does a cost of living benefit provide to policyholders in a disability insurance policy?

1. Increased premiums

2. A one-time lump sum payment

3. Adjustment of benefits for inflation

4. A return of premiums paid

The correct answer is: Adjustment of benefits for inflation

A cost of living benefit in a disability insurance policy provides an adjustment of benefits for inflation. This is crucial for policyholders because it ensures that the amount they receive in benefits maintains its purchasing power over time. As inflation increases, the cost of living rises, which means that the same benefit amount can buy less in the future than it could at the time the disability occurred. By incorporating a cost of living benefit, insurers provide automatic increases in the monthly benefit payments to align with inflation rates, typically based on the Consumer Price Index (CPI) or another inflation measure. This feature helps protect the financial stability of policyholders who may be relying on these benefits to cover living expenses during their period of disability. Other options, while related to disability insurance, do not accurately describe the function of a cost of living benefit. Increased premiums could be a result of various factors but do not relate to the benefit structure during a disability. A one-time lump sum payment may exist in certain policies but is not the nature of a cost of living benefit, which adjusts ongoing payments. Similarly, a return of premiums paid is a different feature that addresses the total premiums if certain conditions are met and does not account for inflation adjustments.