The Easy Guide: The Difference Between Accidental Death and Dismemberment Insurance and Life Insurance

Part of being an adult is learning about and understanding the different types of insurance coverage to protect you and your family members. Insurance helps prevent financial disasters in many unexpected and undesirable situations. However, having the right insurance for your situation is critical.

For example, you may think that you and your family members are covered, when in reality and under your specific set of circumstances, you may not be. You don’t want to leave yourself or your family members in a lurch.

One significant mistake some insurance policyholders make is assuming that accidental death and dismemberment insurance and life insurance are interchangeable or can take the place of the other. In most situations, this is an untrue and risky assumption.

What Is Life Insurance?

A recent report reveals that 41 million individuals in the U.S. said they need life insurance but do not have it. The same study found that life insurance ownership in this country has fallen by nine percent, down to 54 percent of all Americans.

Simply put, all insurance policies are contracts between the insured individual and the insurance company. When the insured pays their premium payments on time and in full, the insurance company agrees to pay a lump sum, or “death benefit,” to the insured designated beneficiaries after their death.

Beneficiaries can use the death benefit for whatever purposes they see fit. Sometimes, they use it to pay for their deceased loved one’s medical, funeral, or burial costs.

Other common expenditures from life insurance proceeds include:

  • Student loans and educational expenses
  • Mortgages
  • Auto loans
  • Investments

Generally, having the safety net that life insurance provides allows families to remain in their homes and have the things they need. A death benefit can help decrease some of the emotional sting and stress of losing a loved one. For instance, the death benefit can pay off a home, allowing children to remain in the same schools with their friends.

Types of Life Insurance

Two main types of life insurance exist—term and permanent. Permanent life insurance provides lifetime insurance coverage, which includes whole life insurance or universal life insurance. On the other hand, term life insurance only protects you for a specified time.

Term Life Insurance

Since it’s the most affordable type of life insurance, it’s no wonder that term life insurance is the most common type of life insurance sold (71 percent of insureds purchase this type), according to the Insurance Barometer Report. It’s also attractive because the premium payments remain the same. However, term life insurance is only in effect for a set amount of time. Term life insurance policies are typically for 10, 15, 20, 25, or 30-year terms.

Suppose the insured dies within the term of their life insurance policy. In that case, their beneficiaries can make a claim and receive the death benefit free of any taxes. After the term policy expires, the insured may have the option to renew the coverage in one-year increments—meaning it has guaranteed renewability. However, it will be at a higher rate each year it renews.

Permanent Life Insurance

Unlike its term counterpart, permanent life insurance gives the insured lifelong coverage.

It costs more than term life insurance because it:

  • Has the potential to last for the rest of your life
  • Typically grows in cash value

Its cash value grows on a tax-deferred basis over the life of the policy. It is a savings portion of the life insurance policy. With most permanent life insurance policies, you can borrow against its cash value or even make a withdrawal. If you decide to terminate your coverage, you can receive the cash value except for any surrender fee.

Keep in mind that the cash value will grow gradually over several years for many permanent life insurance policies. It’s crucial not to count on accessing a significant amount of cash value right away. You can reference your policy illustration for its projected cash value.

Additionally, there are multiple varieties of permanent life insurance:

#1. Whole Life Insurance

This type of policy has a fixed death benefit and cash value element that will grow at a guaranteed rate of return. In addition, several whole life insurance policies pay policyholders dividends that they can use to decrease premium payments or increase their cash value.

#2. Universal Life Insurance

This type of policy has more flexibility compared to a whole life insurance policy. For example, policyholders might be able to change their premium payments and death benefit, considering certain limits. The cash value can grow with a universal life insurance policy, but this will vary by policy type. For instance, an indexed universal life insurance policy will have a cash value that depends on an index such as the S&P 500. A variable universal life policy will usually contain investment subaccounts that the policyholder can select and manage at their discretion.

#3. Burial Insurance

Burial insurance is a small whole life insurance policy with a small death benefit, frequently from $5,000 and $25,000. This type of insurance aims to pay for just funeral costs and the policyholder’s final expenses.

#4. Survivorship Life Insurance

Survivorship life insurance, also known as “second to die life insurance,” covers two individuals under one policy. Typically, it’s a married couple covered together. After both spouses pass away, the policy pays the death benefit directly to their chosen beneficiaries. For most families, a survivorship life insurance policy is just one portion of a larger financial strategy to fund a trust or pay federal estate taxes.

What is Accidental Death and Dismemberment (AD&D) Insurance?

What is the difference between accidental death and life insurance? There are many differences when examining fife insurance versus accidental death and dismemberment. Anyone looking for life insurance should understand several key differences.

AD&D insurance is much less complex, with not as many options and less coverage. The most significant difference between the two is that life insurance generally covers all types of deaths (with few exceptions such as homicide or suicide in some cases)—those caused by both illnesses and accidents. However, AD&D doesn’t cover deaths arising from anything other than accidents.

For example, AD&D won’t provide a death benefit payout if the policyholder died as a result of:

  • Surgery or other medical procedures (unless they were a necessary part of treatment after a covered accident)
  • Drug overdoses of any kind—including if the decedent had a prescription for the drug they overdosed on
  • Bungee jumping or skydiving
  • Racecar driving
  • Acts of war (even if the decedent wasn’t involved in the war)
  • Appendicitis
  • Cancer
  • Their own impaired driving

However, suppose the policyholder’s death was the result of a covered accident. In that case, their beneficiaries have up to a year to file a claim. The same is true if the policyholder needs to claim the disability portion of this coverage.

AD&D covers disabilities such as:

  • Vision loss
  • Hearing loss
  • Speech loss
  • The loss of a limb or appendage

In these cases, an AD&D policy typically pays out half of its value for the loss of one covered ability, such as a hand or an eye. Suppose the policyholder loses two or more covered abilities such as both hands or their eyesight and hearing. In that case, it will generally pay up to 100 percent. However, keep in mind that a life insurance policy will not pay any benefits for disabilities; they only pay death benefits.

Types of Accidental Death Benefit Plans

#1. Group Life Supplement

Suppose you receive your AD&D insurance as a group life supplement. In that case, it is part of a group life insurance contract. Frequently these are offered by employers, and the benefit amount is generally identical to that of the group life benefit.

#2. Voluntary

Voluntary AD&D plans are possible for members of a group, such as employees in a workplace, as a separate and elective benefit. Even though your employer offers this coverage, it’s up to you to pay the premiums. Those who elect this coverage typically pay the premiums through regular payroll deductions whenever payment happens. With this type of AD&D, employees have coverage for accidents that happen while they are on the clock. In addition, these policies pay out benefits for voluntary accident insurance even if the insured party isn’t at work when they suffer injuries or death.

#3. Travel Accident

As opposed to voluntary accident insurance, the policyholder’s employer tends to pay the entire premium for this coverage. Travel accident insurance has an accidental death benefit that provides accident protection to employees while they are traveling for work on company business.

#4. Dependent Coverage

Some group AD&D insurance plans also provide coverage for spouses and dependents. However, this isn’t an option for most types of life insurance.

What is the Difference Between Life Insurance and Accidental Death and Dismemberment Coverage?

These two types of critical coverages can be easily mixed up and overlapped in the minds of policyholders and their families. Is accidental death insurance the same as life insurance? The answer is no. Let’s look at the main differences between these two important but separate insurance types.

#1. Expense

AD&D insurance is almost always less expensive. The trade-off, however, is that it doesn’t cover as much. Some employers offer AD&D for free up to specific amounts. Life insurance typically isn’t free. AD&D premiums vary but usually run about $4-$6 per month per $100,000 in coverage. The same coverage for life insurance can cost several times that.

#2. Types of Deaths

Most life insurance policies cover the vast majority of deaths with few exceptions. For example, most won’t cover suicide death if it occurs within the first two years of the policy’s inception. Most won’t pay death benefits on a homicide until the beneficiaries have been cleared of any wrongdoing.

On the contrary, with AD&D, only accidental deaths are covered. Therefore, policyholders and their families can’t and shouldn’t count on AD&D to protect the policyholder if they die.

#3. Cash Value

While some types of life insurance policies have a cash value or can grow to garner a cash value, AD&D insurance coverage doesn’t aim to offer such a benefit. If you are searching for something that will be an investment or help your overall financial goals, accident death benefits won’t meet that goal.

#4. Duration

The duration of AD&D and life insurance policies vary. Most people have AD&D coverage through an employer. If they quit their job or lose their job, they likely won’t have this coverage anymore. However, life insurance policies aim to last a predictable amount of time (unless, of course, the policy lapses due to non-payment of a premium), if not until your death. You can lose AD&D coverage without warning, but even with term life insurance, you will know when your term ends and will likely have options at that point to continue coverage.

#5. Disability Payments

Unless you rely on any cash value in your policy, a life insurance policy won’t cover disabilities such as the loss of a sense or limb. Life insurance only covers the loss of life, whereas AD&D covers both life and disabilities under some circumstances. If you become disabled by losing a limb, or one of your senses, you can rely on AD&D to help you continue to support your family. You won’t receive any coverage from your life insurance at this time.

Which Insurance Should You Select?

Many people don’t want to choose between life insurance and AD&D coverage. The good news is that you don’t have to choose between them. These policies aren’t mutually exclusive of one another. You can have both, letting each cover the gaps in the coverage the other provides.

If you have questions or concerns about life or accidental death and dismemberment coverage, discuss them with an experienced attorney, financial advisor, or insurance industry expert.

Suppose you file a claim and have difficulty receiving the benefits due and owing to you. In that case, seek legal counsel.