Rhode Island Life Insurance Practice Exam

What advantage does a Cost of Living rider provide the insured?

1. Tax benefits on the increase

2. Additional death benefits

3. Lower premiums over time

4. Guaranteed acceptance into the next policy

The correct answer is: Additional death benefits

A Cost of Living rider is an addition to a life insurance policy that adjusts the death benefit based on changes in the cost of living, typically linked to an inflation index. The primary benefit of this rider is that it ensures the death benefit maintains its purchasing power over time, which is crucial as inflation can erode the value of money. This means that, in the event of the insured's death, the beneficiary will receive an amount that is reflective of the current cost of living rather than a set amount that may have diminished in value. Having a Cost of Living rider effectively increases the death benefit as inflation rises, providing a more substantial financial safety net for beneficiaries compared to a fixed death benefit. By automatically adjusting for inflation, the rider supports the goal of maintaining adequate financial coverage, even as the economic environment changes. The choices that focus on tax benefits, lower premiums, or guaranteed acceptance do not align with the primary function of the Cost of Living rider, which is specifically to enhance the death benefit in response to inflation, thereby protecting the insured's beneficiaries from the consequences of rising living costs.