What does a cost of living adjustment (COLA) rider do for an annuity?

A cost of living adjustment (COLA) rider adds an important feature to an annuity by allowing for adjustments to the income payments based on inflation. This means that as the cost of goods and services increases, the annuity payment amount can also increase, maintaining the purchasing power for the annuitant. This feature is particularly valuable because it helps safeguard individuals against the erosion of their income due to inflation over time.

In contrast, increasing the initial premium paid does not encapsulate the purpose of a COLA rider, since the rider is focused on payments rather than upfront costs. Similarly, while limiting withdrawal amounts may be a feature of some annuities, it does not relate to the purpose of a COLA rider which is to increase income rather than restrict access to funds. Lastly, reducing the guaranteed interest rate is opposite to the intent of a COLA rider, which is designed to enhance or preserve financial benefits over time, not diminish them. Thus, the COLA rider primarily serves to adjust income levels against inflation.