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Accidental death and dismemberment insurance

You've probably received offers for accidental death & dismemberment (AD&D) 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. It's especially important to avoid relying 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 industry experts say it's probably not, if 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, 130,557 people died from unintentional injuries in 2011 (the latest data available). That makes accidents the fifth-leading cause of death for Americans, behind heart disease, cancer, chronic lower respiratory diseases and strokes.

But it's important to note that, depending on the language in your AD&D policy, many types of accidents may not be covered.

Alternatives to AD&D

Because AD&D policies pay out only in specific, generally unlikely circumstances, you're likely 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.

However, AD&D may fill in some gaps. If you do have an AD&D policy, it will pay out in addition to other coverage 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.

How AD&D works

The majority of AD&D claims are for accidental death, says Theresa McConeghey, assistant vice president for the Principal Financial Group. There are normally standard payouts when it comes to loss of limbs.

"Policies are very straightforward on whether the loss of a specific body part qualifies for a benefit under an AD&D policy. A big toe, for instance, doesn't go into a payment category because certain dismemberment policies often start at or above the ankle," says McConeghey.

Principal Financial Group typically offers AD&D insurance through employers’ benefits packages too. Plan benefit amounts vary significantly and can be tailored to meet an employer’s needs, but generally range from $20,000 to $500,000 for an employee individual. Coverage is also available for a spouse when offered in a voluntary program.

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.

Policy exclusions

The circumstances connected with your accident or death could affect your AD&D 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, for example, 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.

Here are some other circumstances that could cancel your AD&D benefit:

  • A loss caused by an accidentally sustained external wound
  • Taking illegally obtained drugs
  • Driving a vehicle while intoxicated

Policy extras

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

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

"Living benefits are also available to people who survive a serious covered accident," says Jim Angstadt, 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.

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."

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