If you purchased accidental death and dismemberment policy and thought it was term life insurance, you have many reasons to be angry. I have decided to write this post for that exact reason. I got tired of getting phone calls from potential clients who said someone got them life insurance, with $250,000 in coverage for $22 per month, and I already know what they were quoted: an accidental death and dismemberment policy. Let’s take a look at accidental death (AD&D) policies, who buys them, the reasons to buy them, and if they are really considered life insurance.
You can learn more here about why you get conflicting life insurance rates.
What is Accidental Death and Dismemberment (AD&D)?
Accidental death and dismemberment policies pay benefits ONLY if you die as a result of an accident-related event. Which means that if you die from cancer, a heart attack, or any other natural causes, then you guessed it – the policy will not pay a dime. Imagine buying car insurance and the only time they will pay is if you have an accident with a Volvo on a Sunday night. It’s pretty funny to think about, but an accidental death policy is the same thing. Would you buy coverage that dictates how you must die in order for them to pay?
How Accidental Death and Dismemberment Policies Work
Accidental death and dismemberment have a death amount just like traditional life insurance, such as $100,000 or $250,000, for example, which will pay the full benefit to the beneficiaries should the insured die as a result of an accident. Not everything is considered an accident, and we will go into more detail on those exclusions.
Car accidents, falls, and unintentional poisonings are the cases in which the policy will pay 100% of the benefits. With most policies, the time that you die as a result of an accident must be within 3 months of the accident. In other words, if you have a car accident and die six months later, the policy would not pay. Some policies pay double the purchased death benefit, if the death is a result of bus, plane, or taxi.
The other case in which the policy will pay is called dismemberment. If you lose a limb or your eyesight because of an accident, the policy will generally pay 25% of the death benefit, depending on the insurance company and the policy type.
Why is Accidental Death and Dismemberment Cheaper than Term Life?
Insurance is all about risks vs rewards. The odds you will die from an accident are very low when compared with dying as a result of a disease. According to the National Safety Council, the chances of dying from cancer or heart disease are 1 in 7, while a motor vehicle crash is 1 in 114, and from a fall is 1 in 127. You can see where this is going; it’s safe to say that it’s a lot easier dying from cancer than a car accident. Accidental death policies are usually cheaper for older individuals than younger ones since younger ones are more likely to die from a car accident than older drivers.
Term life insurance, on the other hand, will cover any death as long as the policy is in force when the insured dies, they didn’t commit suicide in the first 2 years of having the policy, and they didn’t lie on the application.
Accidental Death and Dismemberment Exclusions
As mentioned before, the insured must die as a direct result of an accident and nothing else within a specific time (usually three months). If you have a car accident as a result of a heart attack, the policy will not pay. Keep in mind the exclusions are based on the insurance company and the state you live in, and these are only general exclusions.
Accidental death and dismemberment policies will not pay benefits if the insured dies as a result of:
- A suicide attempt
- Using drugs or alcohol
- Operating a motor vehicle while under the influence of drugs or alcohol
- Intentionally causing injury
- Engaging in committing a felony or illegal occupation
- Traveling outside of the US for more than 14 days
- High-risk hobbies, such as skydiving or car racing
You want to make sure that you disclose all information about your health history. Failure to disclose or misleading the insurance company will result in the insurance company contesting your claim, and they therefore won’t pay the death benefit.
Why do People Buy Accidental Death and Dismemberment Policies?
For starters, accidental death and dismemberment could be a stand-alone policy, or an add-on to a life insurance policy as a rider. You can read here about life insurance riders. Having it as an addition to a traditional life insurance isn’t as dangerous as having it as a replacement to a life insurance. However, the reasons most people are buying these type of policies are:
- They really think they have life insurance policy, and they just found a good deal.
- They can’t get a traditional policy due to health history or occupation, and believe that something as a form of protection is better than nothing.
- They were misled by an agent or a broker.
- Some life insurance policies include this as a rider in the policy without an extra cost.
- Some get it from their employer, which also may include disability income.
How is it Different than Term Life?
Term life insurance is a very simple and straightforward contract, while AD&D has many more caveats to understand. Here are some of the ways the two types of policies differ:
- Term life will pay benefits for any cause of death, except for suicide committed in the first two years of having the policy. AD&D will only pay in the event of an accident or injury as discussed above.
- Term life can be converted to a whole life policy with most companies, AD&D plans cannot.
- If you choose not to convert it, it will continue to be renewed at an annual rate (which is very expensive), and will expire when you are about 95 years old (depending on the company), while most AD&D will expire when you get to 65 years old.
Do You Need AD&D Insurance?
You probably don’t. Unless, of course, you get it for free from your employer, or it’s included in you life insurance coverage at no extra cost. You also never want to have this type of policy as your first choice when shopping for life insurance.
Whether you believe term is better than whole life or vise versa is a different story, but I can promise you that regardless of what you choose, it’s better than buying accidental death and dismemberment insurance.
Life insurance may be the cornerstone of all financial planning, and your beneficiaries should never get to the point that they aren’t getting the death benefit because you didn’t understand the policy you purchased. Worse, how do I plan my death to be accidental so my beneficiaries will get paid? At the end of the day, there are just too many loopholes for the insurance company not to pay the benefits, which defeats the purpose for buying insurance in the first place.
My issue with accidental death and dismemberment insurance is that it’s sold as a replacement for a traditional life insurance policy, or actually sold as a life insurance, while the client doesn’t know what he/she is buying. There is no harm in actually having it, as long as you understand what you are buying.