Connecticut Life Producer Practice exam

What does the Cost of Living rider do for a policyholder?

1. Provides increased cash value

2. Automatically adjusts the insurance amount based on inflation

3. Offers discounts on premiums

4. Guarantees fixed premium payments

The correct answer is: Automatically adjusts the insurance amount based on inflation

The Cost of Living rider serves the purpose of automatically adjusting the insurance amount based on inflation. This is particularly significant for life insurance policies, as it helps ensure that the death benefit keeps pace with the rising costs of living over time. As inflation erodes purchasing power, the Cost of Living rider allows the policyholder's coverage to maintain its value in real terms, providing reassurance that their beneficiaries will have sufficient financial support in the event of the policyholder's death. By addressing the impact of inflation, this rider enhances the policy's long-term effectiveness in meeting the financial needs of the insured's loved ones. This adjustment is usually tied to a recognized inflation index, ensuring that increases occur in a manner reflective of economic conditions. Other options such as increased cash value, discounts on premiums, or fixed premium payments do not specifically relate to the core intent of a Cost of Living rider, which focuses on sustaining the relevance of the death benefit amidst changing economic circumstances.