Basics of Accidental Death & Dismemberment Insurance

A look at the fine print
AD&D pays out in the event of a fatal accident or an accident that results in the loss of a limb or eyesight. If you have other forms of insurance, it offers an added layer of protection. For example, if you lose a limb on the job, you would receive your AD&D benefit and workers compensation. But the policy does have limitations. 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 of the AD&D policy.

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 fail to 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 a payment from it.

J.C. Penney Life Insurance Co., for example, which allows you to have your premium charged to your credit card, offers up to $1 million in AD&D protection. But your family collects that amount only if you die in a "common carrier" accident - that is, a crash involving a plane, bus, train, or city subway. If you die in an automobile accident, the policy pays out $100,000. Your family receives $25,000 if you die in any other kind of accident. The premium is $7.95 a month.

Upon closer look at how "dismemberment" works, if you lose one "member,'' you would receive 50 percent of the full benefit. A member is a hand, foot, limb, or the sight in one eye. If you lose two or more members, you would receive the full amount. Most policies pay one-quarter of the principal if you lose both your thumb and index finger. If you lose only your thumb, you won't receive the benefit.

Who sells this?

One generally purchases AD&D through credit card offers, with the policy underwritten by major insurers. Some credit unions also offer AD&D insurance with minimal coverage for no cost.
Many major insurance companies sell AD&D to employees in a variety of occupations as part of group life or health plans. Many employers connect the amount of coverage to the worker's salary. For example, at Stanford University, an employee who wants to buy $150,000 or more of AD&D coverage must be earning at least 10 percent of the principal amount, or $15,000 a year. The worker's maximum coverage also may not exceed 10 times his or her annual salary.

What it costs

Lou Madonna, national director of special risk sales at Hartford Life Insurance Co., in Simsbury, Conn., says people in a variety of professions purchase between $100,000 and $500,000 worth of AD&D insurance from his company, with premiums averaging around $60 a year, depending on the amount of coverage. Hartford Life typically offers the coverage through group plans, and usually hopes that between 60 and 70 percent of the group's workforce will buy AD&D, he says.

"AD&D should be part of somebody's overall planning," Madonna says. "The foundation most people should start with is life insurance, then look at AD&D as a supplement to that." He adds, "Most people I know can't afford or maybe don't want to spend those dollars solely on life insurance, and that's where the AD&D comes in."

Wayne Durflinger, life and health general underwriting consultant with State Farm Life Insurance Co., based in Bloomington, Ill., says his company offers two types of AD&D policies, but neither is very popular. "People would rather take the extra money and buy a little extra life insurance," he points out.

State Farm Life policyholders can buy additional accidental death (without dismemberment) coverage as part of a life insurance policy. The rates vary depending on your age. If you're 35 years old and don't smoke, a $100,000 accidental death policy could cost $88 a year in addition to your life insurance premium, which costs a 35-year-old nonsmoker $1,405 a year for a $100,000 policy, Durflinger says.

If you're killed in an accident, your beneficiary would receive $100,000 from your life benefit, plus $100,000 from your accidental death benefit. The accidental death benefit doubles if you're killed while a passenger aboard a public conveyance, such as a commercial airline. In other words, your beneficiary would receive $300,000 in the unlikely event you perish in a plane crash. Durflinger says only 6 percent, or 324,000 out of 5 million State Farm Life policyholders, opt for the accidental death rider.

State Farm Life also offers accidental death with dismemberment coverage as a rider to health insurance. A policy with a $25,000 benefit would cost $31.50 a year. Durflinger says about 1 percent of State Farm's health insurance customers buy State Farm's AD&D policy.

Who needs it?

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 Durflinger says an insurer might not offer the policy to someone who routinely engages in risky activities.

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."