Certified Financial Consultant (CFC) Practice Exam

What type of policy rider adjusts the face value of a life insurance policy according to inflation rates?

1. Guaranteed Insurability Rider

2. Cost of Living Rider

3. Accidental Death Benefit Rider

4. Waiver of Premium Rider

The correct answer is: Cost of Living Rider

The Cost of Living Rider is specifically designed to adjust the face value of a life insurance policy in line with inflation rates. This rider ensures that the policy's benefit amount increases periodically, thereby maintaining the purchasing power of the policyholder’s beneficiaries in the event of the policyholder's death. As inflation rises, the cost of living increases, which means that the initial death benefit might not provide adequate financial support over time. The Cost of Living Rider addresses this concern by automatically increasing the death benefit based on a predetermined inflation index, such as the Consumer Price Index (CPI), ultimately helping to protect against the eroding value of money. The other types of riders serve different purposes and do not have a direct correlation with inflation adjustments for a policy's face value. For instance, the Guaranteed Insurability Rider allows a policyholder to purchase additional coverage in the future without providing evidence of insurability. The Accidental Death Benefit Rider provides extra coverage if the insured dies due to an accident, while the Waiver of Premium Rider ensures that premiums are waived if the policyholder becomes disabled and unable to work. Each of these riders serves specific functions but does not address the inflationary adjustments that the Cost of Living Rider does.