What is the purpose of a Cost-of-Living Adjustment (COLA) rider?

The purpose of a Cost-of-Living Adjustment (COLA) rider is to increase benefits in accordance with inflation. This rider ensures that the value of benefits received by the policyholder will keep pace with rising costs due to inflation, thereby maintaining the purchasing power of those benefits over time. Inflation can erode the value of money; therefore, a COLA rider is crucial for protecting against this erosion, making it especially important in long-term policies, such as disability income or life insurance.

In contrast, the other options could relate to different aspects of insurance policies or financial products but do not accurately describe the primary function of a COLA rider. Lowering premiums might refer to rate adjustments due to various factors but doesn’t relate to inflation or cost-of-living. Providing annual bonuses is typically associated with specific types of investment products or annuities rather than insurance benefits. Adjusting benefits based on investment performance is a mechanism relevant to variable policies or investment-linked products, not a COLA rider's purpose.