Anyone who gets a long-term disability income insurance (LTD) claim approved has already crossed a significant hurdle. Due to the time it can take to complete the LTD benefits approval process, they are also often under financial strain. Particularly in periods of high inflation, when the cost of living is rising steeply, they may be wondering, “Do LTD payments keep up with inflation?” Unfortunately, most long-term disability policies do not allow for LTD benefits inflation adjustment (COLA) changes. The long-term disability benefits inflation gap can sometimes become noticeable even in the time it takes to get approval of your LTD claim.
Although most LTD benefit payment models are tied to a percentage of your income at the time you leave work and submit your LTD benefits claim, some individual policies may offer supplementary coverage that add a cost-of-living increase for long-term disability benefits over time. Keep in mind that these supplements will have their own costs in insurance premiums, so if you are still in a position to be selecting a long-term disability plan you may want to consult with an attorney or financial expert to discuss whether purchasing additional coverage vs. investing the money you would spend on the extra premiums makes the most sense in your specific situation.
What Is Inflation?
The International Monetary Fund (IMF) defines inflation as “the rate of increase in prices over a given period of time.” As calculated by economists, inflation shows the purchase of the same goods or services requiring more units of a given currency over a specified time range. Often this time range is defined as the course of a quarter or a year, but economists also frequently compare the prices of commonly purchased goods and services in one month to the average purchase prices for the same or comparable goods or services one year earlier to determine the “year over year” rate.
Inflation and Currency
Inflation is currency-specific, meaning that an item could be worth $2.37 (price in United States dollars) and worth €2.15 (price in Euros) on a given day, but six months later the same item might cost $3.47 while the price in Euros remains unchanged. This differential would generally indicate that the dollar is experiencing inflation, but the reverse could also be true: If the item goes from a purchase price of €2.15 to €2.96 over six months, while the price in United States dollars holds steady at $2.37, then the relative change serves as a signal that the Euro is experiencing inflation, while the dollar remains stable.
Inflation and the Cost of Living
In actual practice, economists do not typically rely on the purchase price of a single item, or in most cases even a single class of items, to determine whether inflation is happening or at what rate. If seasonal weather conditions in Madagascar result in a poor harvest of vanilla beans one year, the shortage will very likely cause the costs of some desserts to rise, but generally speaking this one event will not by itself cause a runaway escalation in the price of Japanese steel. Even when the prices of many different items are rising at once, economists typically consider multiple factors and review several weeks to months of data in making pronouncements regarding inflation rates and a nation’s overall economic health.
Debates and Misconceptions Concerning Inflation
By its nature, inflation means that people have less purchasing power for the same amount of money over a given period of time. Understandably, therefore, it gets a bad name. In some situations, however, modest rates of inflation are associated with periods of economic growth. This association is not as simple as “pace-matching” of costs to available funds, but often year-to-year increases in a country’s gross domestic product (GDP) will be accompanied by a series of adjustments throughout the national economy that roughly “compensate” for the increase in available wealth, raising prices as more people have more money.
When active, this association between inflation and economic growth tends to suppress the benefits individuals see from that growth, so whether this relationship is inevitable and how to handle it appropriately are hotly debated topics not only among economists, but also among policymakers. Most countries today do accept some degree of inflation as one of the baseline assumptions they factor into national economic planning, but in the United States as in many other countries there are broad differences of opinion concerning how and when to “manage” inflation and the factors that contribute to it.
Fixed Incomes and Inflation
Most consumers notice inflation primarily when their own incomes do not keep pace with the changing value of whatever currency they use. What this looks like in the United States is that the purchasing power of the dollar declines faster than the wages paid in dollars increase, so a single individual becomes poorer month after month, while continuing to earn the same dollar wage for each pay period within the timeframe considered. When this widening gap between dollars earned and dollars needed affects many people at once, it can often result in an economic downturn.
In the business world, there are often periodic adjustments that help to partially “correct” for the gradual decrease in individual purchasing power. Even though these adjustments may not always be made quickly enough to satisfy individuals who are feeling particularly pinched during a period of steep inflation, the mechanisms for adjusting income relative to the costs of living are usually in place. For individuals and families living on “fixed” income sources like the benefits paid under many long-term disability plans, the lack of this type of cost-of-living adjustment (COLA) often leads to a steadily declining standard of living over time.
What Is a COLA and How Does It Work?
A cost-of-living adjustment, or COLA, is a change in the amount of a payment made in order to account for the predictable effects of inflation on the spending power of a recurring payment that would otherwise remain static, delivering the same amount at each scheduled payment date. Many companies factor COLAs into their employee pay assessments annually. In this case, the results are often referred to as “cost of living raises.”
That phrase distinguishes COLAs from the raises given to reward strong performance or to accompany a promotion. The expression also underscores a predominant, often accurate, perception that economic trends will generally keep the cost-of-living trending upward, so that an employee’s salary in one year, if left unchanged, will give them less buying power in the next year. To the extent that this assumption is accurate, employees in organizations that do not make these cost-of-living adjustments to employee wages will effectively see their pay “cut” each year: Even though the number of dollars per pay period may remain the same, that amount is worth less and less as time goes on.
Do LTD Payments Keep Up With Inflation Compared to Social Security?
Some types of disability benefits receive COLA updates regularly. The most notable example here is perhaps the payments made under Social Security Disability Insurance (SSDI). SSDI is typically known as a form of “fixed income” – but the benefit payments are “fixed” throughout the year, not for all of time.
Individuals on long-term disability who are also approved for SSDI benefits may see a January increase in their benefit payments and wonder if they will also receive an LTD benefits inflation adjustment (COLA). For most people asking the question, “Do LTD payments keep up with inflation?” the answer, unfortunately, is usually “no.” The long-term ramifications of long-term disability benefits inflation trailing can therefore be substantial. They are also uneven from year to year, which can make such considerations as long-term disability transition to retirement difficult.
Preparing for an Uncertain Future: Cost of Living Increase for Long-Term Disability Recipients
Most long-term disability benefits inflation questions are asked in reference to LTD policies under employer-sponsored group plans. If you have purchased additional coverage, it is worth checking to see whether cost of living increase for long-term disability benefits may be one of the included advantages under a rider or supplementary policy. Otherwise, many of the most important steps you can take toward securing your financial future without a regular LTD benefits inflation adjustment (COLA) are those that are commonly recommended to anyone planning on a tight budget or a fixed income. Often individuals wondering, “Do LTD payments keep up with inflation?” can protect themselves to a degree through alternative mechanisms, such as investing in certificate of deposit (CD) savings accounts that yield higher interest than ordinary savings, in exchange for the account holder’s commitment to keeping the funds in the CD for a set period of time. Other savings and cautious investments may also be beneficial. If your long-term disability policy allows you to work part-time and you are able to do so, even sporadically, you may be able to occasionally supplement your income in this manner. Ultimately any lengthy period on a fixed income that does not adjust for cost of living on a regular basis is likely to become a challenge, so you may wish to review your options with a disability attorney or financial adviser to get assistance developing a personal financial management strategy that can carry you into retirement eligibility.
