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AD&D coverage overlaps a bit with life insurance and disability insurance, but it shouldn’t be considered a replacement for either one.
Accidental death and dismemberment insurance (AD&D) pays out if you die or get seriously injured in an accident, such as a car crash.
The payout for injuries is limited to cases where you lose a limb or finger; lose sight, speech or hearing; or suffer paralysis or coma as the result of an accident.
The coverage overlaps a little with life insurance and disability insurance, but it shouldn’t be considered as a replacement for either one. Understanding the differences is important because you might be offered AD&D along with other benefits at work. You can also buy AD&D on your own, apart from your workplace, and you might get offers to buy AD&D coverage from your bank or credit union.
The main thing to remember is that AD&D is a supplement to life insurance and disability insurance. If your family would be in a tough financial situation if you died and they lost your income, buy life insurance, not AD&D. To cover the risk of being unable to work because of an injury or illness, make sure you have enough disability insurance.
How accidental death and dismemberment insurance works
When you buy an AD&D policy it will have a “face amount,” such as $100,000. But the policy won’t pay that amount for every situation it covers. Generally an AD&D policy pays:
- 100% of the face amount for an accidental death.
- A percentage or the full face amount for an injury, depending on its seriousness. For example, you might collect 25% if you lose a thumb and index finger on the same hand, 50% if you lose a hand or foot or sight in one eye, and 100% if you lose two or more limbs or sight in both eyes.
Some policies pay double the face amount for injuries or deaths due to accidents while riding as a fare-paying passenger on a bus, train, plane, ferry or taxi.
The beneficiary of your AD&D policy (such as your spouse) collects the money in the case of an accidental death, and you collect if you suffer one of the injuries spelled out in the policy. The amount of coverage you can buy through an employee benefits plan is often limited to a multiple (such as 10 times) of your annual salary.
“The beneficiary of your AD&D policy collects the money in the case of an accidental death, and you collect if you suffer one of the injuries spelled out in the policy.”
Compare that to life insurance, which pays money to your beneficiary if you die from any cause — such as accident, illness or old age — except for suicide during the first one or two years of the policy, depending on the state.
Some AD&D insurance policies tack on additional benefits or offer them as optional extras, such as bereavement counseling for family members after an accidental death, or payment for a surviving spouse to use for educational training for employment.
Situations where AD&D insurance will not pay
For an AD&D policy to pay out, the death or injury must be a direct result of an accident and independent of any other causes. Say, for example, you suffer a heart attack while driving, which leads to a fatal car accident. The policy likely would not pay out.
Even if the death is solely due to an accident, the death benefit is paid only if the death occurs within a certain time frame after the accident. Depending on the policy, the time frame may be from a few months to a year.
AD&D insurance policies also typically exclude coverage for accidental injuries or deaths from the following:
- Drinking and driving
- Bungee jumping
- Car racing
- Suicide or attempted suicide
- Drug overdose
AD&D insurance is cheap because there aren’t many claims
AD&D insurance doesn’t cost much because it’s low risk to insurance companies; it rarely pays out. The lifetime odds of dying in a motor vehicle crash, the most common type of accident covered, are 1 in 112, for instance, compared to 1 in 7 for heart disease and cancer, according to the latest data available from the National Center for Health Statistics and National Safety Council.
If you have dependents who would suffer financially if you died, the safe bet is to put your money toward buying life insurance, then perhaps consider AD&D insurance, but only as a supplement. Certainly the money from an AD&D claim would be helpful to grieving loved ones or the injured policyholder. But it is not a reliable replacement for any amount of life insurance coverage.
There’s no harm in opting for AD&D if your employer offers it as a benefit and pays the entire premium. But if you’re paying the bill, you’re better off putting money toward life insurance if you need it, or toward disability insurance.
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