Accidental death and dismemberment insurance has a couple of things going for it.
One, it's cheap--only a few dollars a month for tens of thousands of dollars in coverage.
Two, it provides a little peace of mind when you read headlines about deadly crashes and ponder the possibility of a similar accident ever happening to you. If you died or were maimed in an accident, an AD&D insurance policy would pay out a lump-sum benefit.
But AD&D should never be considered as a replacement for life insurance or disability insurance. Here's why.
AD&D insurance pays the full benefit to your beneficiary only if you die in an accident, but you're much more likely to die of illness or old age. The No. 1 and No. 2 American killers are heart disease and cancer, respectively, which together account for 48 percent of all deaths. Accidents accounted for only 5 percent of deaths in 2007, according to the latest figures from the Centers for Disease Control and Prevention.
Besides paying out if you die from an accident, AD&D policies pay a percentage of the benefit if you're seriously injured in an accident. Typically, an AD&D policy pays 50 percent of the benefit for loss of a hand, foot or sight in one eye, for instance. Enhancements are also available to cover paralysis or coma, and to pay for the costs of job retraining.
However, even though disability is often associated with car crashes or nasty falls, freak accidents are responsible for a fraction of disabilities. Injuries and poisoning accounted for only 10 percent of disability insurance claims in 2010, according to the Council for Disability Awareness' 2011 Long-Term Disability Claims Review. And that percentage includes all injuries--the vast majority of which would not be covered by AD&D.
A traditional disability insurance policy pays a percentage of your income if you become disabled and can't work. It's essential coverage for your most valuable financial asset--the ability to generate income. AD&D pays only a one-time lump sum, and it pays only under very limited circumstances.
"AD&D covers such a little sliver of risk," says Barry Lundquist, Council for Disability Awareness president. "It's not going to come close to doing the job of protecting someone's income."
"People think, 'If I die in an auto accident, my family will automatically be able to collect on an AD&D policy,'" says Edward Graves, associate professor of insurance at The American College in Bryn Mawr, Pa.
But insurance companies are very particular in how they define "accident," Graves says. For instance, if you have a history of heart problems, an insurer could challenge a claim following an accident if there is any evidence a heart attack led to the accident.
In addition, insurance companies in some states are allowed to limit the window for claims to a 90-day time period after an accident. What if you die 91 days after the catastrophe? Your beneficiary is out of luck.
Also excluded from coverage are incidents of death or dismemberment that result from:
· Suicide or self-inflicted injuries.
· Intoxication or illegal drug use.
· Commission of a felony by the insured.
· Active military duty or training.
Because of the rarity of death and dismemberment from accidents and the policies' restrictions, AD&D insurance hardly ever pays out. That's why the premium is so low, Graves says.
Instead of relying on AD&D insurance, Graves suggests you make sure you have enough standard life insurance to cover all your dependents' needs. Don't count AD&D insurance as part of that total, or you could wind up woefully underinsured if you died from something other than an accident.
"Buy it only after you've taken care of all your other insurance needs first--both life insurance and disability," Graves says.
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