The basics of accidental death and dismemberment insurance

You've probably received offers for accidental death & dismemberment (AD&D) insurance from your credit card companies, mortgage holder, bank or other organizations. But it's important not to confuse this type of insurance with standard life insurance, and it's especially important not to rely solely on AD&D to provide for your dependents in the event of your death.

AD&D policies are relatively inexpensive and easy to understand. At first blush, purchasing an AD&D policy might seem like a wise investment for anyone. If you die accidentally, your beneficiary stands to collect lots of money. If you lose an arm or other limb, or your sight, you would collect a significant sum. (Specific payments will be spelled out in your policy application.)

But is AD&D really a good value? Some insurance experts say it's probably not, when you consider the odds of making a claim (and the small number of actual claims is why these policies can be offered so cheaply).

Just how likely is it you'll die from an accident? According to the Centers for Disease Control and Prevention, 117,809 people died from unintentional injuries in 2005 (the latest data available. A study in the Journal of the National Cancer Institute says that age is also a factor in the leading causes of death. If you are a 35-year-old nonsmoking male, you are five times likely to die in an accident before age 45 as you are to die from heart disease. If you are a woman of the same age, your are twice as likely to die in an accident than from breast cancer. Compare that to the death rates for the No. 1 killers of heart disease (219.1), malignant neoplasms (cancer, 188.7) and cerebrovascular diseases (such as diabetes, 48.4).

You're more likely to die from natural causes than from an accident if you are older than 40 or 45. You're also more likely to become disabled by a back injury than you are to lose a limb, but that also depends on what sort of risks you engage in.

Policy particulars

The majority of AD&D claims are for accidental death, says Theresa McConeghey, assistant vice president for Principal Financial Group.

There are normally standard payouts when it comes to loss of limbs.

"Policies are very straightforward on body parts in an AD&D policy. A big toe, for instance, doesn't go into a payment category because certain dismemberment policies often start above the ankle," says McConeghey.

Principal Financial Group typically offers AD&D insurance through employers’ benefits packages, too. Plan benefit amounts can be tailored but generally range from $20,000 to $500,000 for an individual and provides coverage for your spouse and children. On average, a family can be insured at a cost of between $10 and $20 per year for about $50,000 in benefit.

"Well over 95 percent of our basic group life insurance customers buy AD&D coverage along with their policy," says McConeghey.

As another example, State Farm Life offers accidental death and dismemberment coverage as a rider to health insurance. A policy with a $25,000 benefit costs $31.50 a year.

Other ways to cover yourself

Because AD&D policies pay out only in specific, generally unlikely circumstances, you're far better off putting your insurance dollars into other policies that will provide broader coverage, such as:

• Life insurance: For protection against the more likely risks, like dying of old age or cancer, you're better off putting your monthly premium payment toward a standard life insurance policy.

• Health insurance: If you're injured in an accident, health insurance will help cover hospital and medical bills. Of course, health insurance does not pay you a lump sum should you lose a limb or your sight.
• Workers comp: If you do lose a limb — or hurt your back — on the job, workers compensation likely covers treatment for your injury. Even so, McConeghey points out that AD&D fills the gaps of other insurance policies.

If you do have an AD&D policy, it will pay out in addition to other coverages you have. For example, if you lose a limb on the job, workers comp would still pay for your treatment and the AD&D policy would pay you a lump sum.

The fine print

Your policy may state that in order for you to receive benefits, your death or the loss of a limb or eyesight must occur within a certain time frame after the accident, usually within three months. And your death must be a direct result of the injuries you sustained in the accident. If you die and meet the criteria, the policy would pay the principal, or full, amount. Loss of limbs or eyesight are paid on a "scheduled" basis, meaning a portion of the principal amount.

Other circumstances connected with an accident or your death could affect your benefits. Exclusions in AD&D policies depend on the insurance company, so experts suggest you shop around for the right policy.

"Consumers should spend time looking to see what's covered under their policy," recommends McConeghey. "There are generally several exclusions. We cover mountain climbing, but other policies may not cover this activity. Events such as dismemberment due to a suicide attempt would fall under life insurance and would be an exclusion; it would not fall under an accidental death policy."

For example, if you commit suicide or attempt to hurt yourself on purpose, the AD&D policy would not pay out. The same holds true if the accident or your death is caused by a war.

The policy would not pay out if the death or loss is caused by physical or mental illness, or if you die during surgery. And a bacterial infection, drug overdose or a hernia that contributes to your death or an accident would not be covered under AD&D, according to the language in many policies.

If you have a heart attack while driving and crash your car, your beneficiary would not receive any payment from the AD&D policy. But if you have standard life insurance, your beneficiary would receive the death benefit.

Exceptions in most AD&D policies

Accidental death and dismemberment benefits will not be paid if your death or dismemberment results from:

• Physical or mental illness
• The diagnosis of or treatment of a physical or mental illness
• A loss caused by an accidentally sustained external wound
• War (declared or undeclared) or injuries resulting from armed aggression or combat — that includes nuclear weapons
• Suicide or attempted suicide
• Intentionally injuring yourself
• Taking illegally obtained drugs
• Driving a vehicle while intoxicated

Extras

AD&D policies do not cover emotional trauma due to an accidental death or dismemberment, but some offer counseling or "spouse career adjustment."

"Our accidental death policy pays additional benefits to continue the education of the surviving spouse up to two years," says McConeghey of Principal Financial. "Accidental death policies should be geared to helping the surviving spouse get back on their feet."

In addition to counseling, some companies like CIGNA also provide legal and financial support.

"Living benefits are also available to people who survive a serious accident," says Jill Roman, spokesperson for CIGNA. "These benefits can include home and vehicle-alteration benefits (for example, if someone becomes paralyzed), child care benefits, rehabilitation and more."

You might fare even better if you tried to live safely. If a person insured by an AD&D policy dies in an automobile accident, the beneficiary might receive an additional $10,000 because they wore a seatbelt. Principal Financial also has a public-transportation option that covers you if you're on an airplane, trolley, bus, taxi or boat.

"We would pay an additional 100 percent because when a customer chooses to ride on public transportation they have no choice over who the driver is. Therefore, they have no idea about this person's driving record. It's a good option to have if they are a regular patron of public transportation," explains McConeghey.

Who sells AD&D

One generally purchases AD&D through workplace benefits as part of group life or health plans. Employers will often connect the amount of coverage to your salary and you won't need to fill out a medical history to apply — workplace-based coverage offers guaranteed acceptance.

You can also purchase AD&D from credit card offers, with the policy underwritten by major insurers. Some credit unions also offer AD&D insurance with minimal coverage for no cost.

Generally, insurers selling AD&D target anyone seeking inexpensive accident coverage. Younger people who are in high-risk jobs such as heavy construction might consider purchasing AD&D, although premiums for people in dangerous jobs are likely to be more expensive.

A "must" for an AD&D policy

According to McConeghey, the characteristics of a good AD&D policy are benefits that match basic life insurance policies. "If you have $100,000 in life insurance coverage, your AD&D policy should also be $100,000," suggests McConeghey. "Life insurance coverage is rarely adequate enough to cover financial loss due to death. I highly recommend those in dangerous lines of work take advantage of their company's accidental dismemberment policy. It really does make a difference if something should affect their ability to work."