Accidental death and dismemberment: The grisly details count

Given its low price, accidental death and dismemberment insurance might sound like a good idea, especially when you see headlines about fatal crashes and freak accidents and think, "What if that happened to me?"

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The coverage pays a lump sum of cash to your beneficiary if you die in an accident and a portion of the benefit to you if you're severely injured.

Sometimes offered as part of an employer's benefits package, AD&D insurance is also marketed by credit card companies, banks, mortgage companies and other groups. (See: "Accidental Death and Dismemberment Insurance.")

Here are some do's and don'ts when it comes to AD&D.

Do understand how the policy works.

This means digging into the grisly details. A policy pays 100 percent of the benefit if you die in an accident and spells out the percentages of payment you receive for injuries, such as loss of a limb, sight or hearing. You might get 50 percent of the benefit if you lose a hand or foot, for instance, and 25 percent if you lose an index finger and thumb on the same hand. (See: "Open enrollment: 5 tips for selecting the best benefits.")

Some losses are excluded, such as those caused by active duty or training in the military; suicide or self-inflicted injuries; intoxication; or commission of a crime by the insured.

Your death or injury must be a direct result of an accident and occur within a certain timeframe, usually within 90 days. If you had a stroke while driving and crashed, the AD&D policy wouldn't pay out because the stroke caused your death, not the accident. (See: "4 reasons why AD&D won't cut it.")

Don't count on it as a replacement for life insurance.

An AD&D policy pays out the full benefit only if you're killed in an accident, not if you die from any other cause.

"The first word is the most important -- accidental," says Joe Skarda, a financial adviser with San Antonio-based Sapient Financial Group.

Instead, he recommends buying term life insurance, which you can buy at about the same price as AD&D if you're young and healthy. Term life pays a death benefit to your beneficiary regardless of how you die.

What is AD&D? Don't think of it as disability insurance.

Disability insurance replaces a portion of your income if you become disabled and can't work. It's essential coverage because it protects your most valuable asset -- the ability to make a living and support a family. (See: "5 group disability insurance myths.")

AD&D insurance doesn't come close to offering that vital protection. The policy provides just one lump-sum payment and only if you suffer certain accidental injuries defined in the policy. Most new long-term disability insurance claims stem from musculoskeletal and connective tissue disorders, such as arthritis -- not accidental injuries, according to the Council for Disability Awareness.

Don't let headlines skew your judgment.

Fatal crashes and scary freak accidents make headlines because they're rare. You're much more likely to die of heart disease, cancer or stroke than from an accident, the fifth leading cause of death, according to the Centers for Disease Control.

Loss of a limb is also rare. Injuries make up less than 5 percent of the diagnoses for new Social Security Disability Income awards, according to the 2012 Council for Disability Awareness Long-Term Disability Claims Review.

Do consider it only as an extra -- not a primary -- layer of protection.

Typically an employer offers AD&D alongside group life insurance at matching levels. You might be offered $50,000 in life insurance and $50,000 in AD&D. The extra coverage could help a family in the aftermath of tragedy. Any premature death is tragic, but an accidental death happens in a split second, giving a family no time to prepare. AD&D provides that extra layer of coverage in such an instance, and it might be worth considering if you work in a dangerous occupation.

Still, consider the potential AD&D payout as an extra bonus. Don't count it as part of your life and disability protection when you're doing a financial plan.