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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 "creates the illusion of having a lot more coverage." |
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 coverages will be spelled out in your policy application.)
But is AD&D really a good value? 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, in 2005, 114,876 people died from accidents, making accidents the 5th leading cause of death in the United States; that's a rate of 38.8 people per 100,000 population. 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.
AD&D insurance fails to cover death from "natural causes" or disease. AD&D "creates the illusion of having a lot more coverage," says Michael Snowdon, an academic associate at the College for Financial Planning in Greenwood Village, Colo.
Unum, which has about 30,000 group AD&D policies in force, offers $250,000 in coverage for $10 a month. It defines "accidental death" as "the loss of life caused solely by external, violent, and accidental means and not contributed to by any other cause."
Examples of covered losses from
an Unum AD&D policy
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| Life |
Full amount |
| Both hands
or both feet
or sight of both eyes |
Full amount |
| One hand and one foot |
Full amount |
| One hand and sight of one eye |
Full amount |
| One foot and sight of one eye |
Full amount |
| Speech and hearing |
Full amount |
| Quadriplegia |
Full amount |
| Triplegia |
Three-quaters of the full amount |
| Paraplegia |
Three-quaters of the full amount |
| One hand or one foot |
One-half of the full amount |
| Sight of one eye |
One-half of the full amount |
| Speech or hearing |
One-half of the full amount |
| Hemiplegia |
One-half of the full amount |
| Thumb and index finger of same hand |
One-quarter of the full amount |
| Uniplegia |
One-half of the full amount |
| Source: Unum |
The Hartford's AD&D plan is typically offered through
employers’ benefits packages, too. Plan benefit amounts can be tailored but generally range from $100,000 to $500,000 for an individual and provides coverage for your spouse and children. On average, a family can be insured for less than $10 a month for about $200,000 in benefit.
State Farm Life also offers accidental death and dismemberment coverage as a rider to health insurance. A policy with a $25,000 benefit would cost $31.50 a year. About 1 percent of State Farm's health insurance customers opt for the AD&D coverage.
Jerry Rosenbloom, a professor of insurance and risk management at Wharton School of the University of Pennsylvania in Philadelphia, recommends taking the money you would spend on AD&D and investing it in other forms of insurance. AD&D protection is too limited, he says.
"If you need the protection, you need it from any cause — be it an accident or something else," Rosenbloom explains. "If you have adequate protection against anything, you really don't need AD&D," Rosenbloom says.
Because AD&D policies pay out only in specific, 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 will most likely cover treatment for your injury.
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.
Your policy may state that 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.
| "Very few people actually die by accident." |
Other circumstances connected with an accident or your death could affect your benefits. For example, if you commit suicide, attempt 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.
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. If you enjoy bungee jumping or extreme sports, you might think of taking out a policy, but an insurer might not offer the policy to someone who routinely engages in risky activities.
"Many consumers focus on natural causes of death and do not consider accidental death in their financial planning. But accidents happen," says Lynn Cannon, assistant vice president of accident lines underwriting in The Hartford’s group benefits division. "About one in eight Americans will be seriously injured in an
accident each year, according to the National Safety Council. Many of those
accidents lead to death or dismemberment. It’s important to protect yourself against that risk," she says.
Meanwhile, Snowdon, of the College of Financial Planning, remains skeptical about this type of insurance, which he says is like a taking a gamble with lousy odds. "Very few people actually die by accident and collect under the accidental death and dismemberment benefit," he says. "If you've got all kinds of money, and you don't care how you spend it, and you want to cover something that's not likely to happen — buy it."
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