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Benefit Calculation

Cost of living (COLA) riders: How the Monthly Number Is Actually Calculated

Cost of living (COLA) riders: basis = n/a, ratio 3% simple or cpi-u, taxed same.

Updated Oct 22, 2026 154 words Reviewed against primary sources
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Key facts
Wage basisN/A
Replacement ratio3% simple or CPI-U
Tax treatmentSame

A 20-year claim without inflation protection loses half its real value. Simple 3% costs far less than CPI-linked and usually wins on value for claims under 15 years.

The calculation

Parameter Detail
Benefit component Cost of living (COLA) riders
Wage basis N/A
Ratio 3% simple or CPI-U
Tax treatment Same

Two policies can both say ‘60%’ and pay thousands apart — the difference lives in the wage basis and the tax line, not the headline ratio.

Worked example

Take a $120,000 package that is $90,000 base plus $30,000 bonus. A ‘salary’ policy pays 60% of $90,000 = $4,500/month. An ‘income’ policy paying 60% of documented average earnings pays $6,000. Same person, same premium tier — $18,000 a year apart.

What to check in your contract

  • The word after ‘disability income’ — salary, earnings or income.
  • Whether employer-paid premiums make benefits taxable.
  • Whether the ratio applies before or after SSDI offset.

Cost of living (COLA) riders: the headline ratio is marketing — the wage basis and tax line are the contract.

Frequently asked questions

Why does everyone say 60%?
60% of a tax-free benefit roughly equals after-tax take-home u2014 the ratio assumes individually-owned coverage.
Are disability benefits taxed?
Employer-paid: yes. Individually-paid premiums: no. Group voluntary plans: usually yes.
Does the benefit grow over time?
Only with a COLA rider u2014 without one, inflation halves a 20-year claim's real value.
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