A few years ago when people would stand around the water cooler discussing life insurance coverage, it was often mentioned that an individual was carrying an accidental death rider or double indemnity rider along with their regular life insurance coverage. In fact it was one of the most common riders, along with waiver of premium, that insurance agents would recommend to their clients because of it increasing the face amount of insurance to twice the death benefit in the event of an accident.
Evolution of AD&D
The issuing of accidental death and dismemberment policies never really caught hold for the buying public even though they were extremely inexpensive. This may be due to the public recognizing how few people actually die from accidental causes. It is reported by the CDC (Center of Disease Control) data for 2017 that of the 2,813,503 people who died in the United States, 92.5% were of natural causes; or in other terms, 863.8 deaths per 100,000 population were from accidents. It is interesting to note that of these accidental deaths, 20% are from accidental poisoning, 18% from motor vehicle accidents, and 15% from falls. (https://www.cdc.gov/nchs/fastats/death.htm)
Though stand alone policies never really caught on with the buying public, the concept of accidental death coverage became very popular with group plans offered by employers. The coverage (AD&D) allowed employers to offer a supplemental insurance plan at no cost to employees with the premium charged being deductible as a business expense as long as they are an ordinary and necessary business expense. It appears if disbursement from an insurance company comes to the employer and then is paid out to the employee as a salary, the employer can deduct such payment as a legitimate business expense. If on the other hand, the employee pays for AD&D on an after tax basis, benefits received are not subject to income tax. The accidental death portion of benefit is treated as life insurance, so not subject to income tax since that is a benefit provided to all life insurance contracts; whereas, the dismemberment provision could be considered as health insurance benefit, so it may be subject to being included as income. IRS Publication 502, “Contributions to an employer sponsored AD&D” may be helpful to a complete understanding on how benefits are received and how they are taxed. https://www.irs.gov/forms-pubs/about-publication-502
Players in the Market
Along with regular life and health insurance companies, automobile insurance companies, certain financial institutions, and service associations provide AD&D benefits.
Many automobile insurance companies along with riders you can add to your auto policies give you an option to purchase AD&D. This benefit will pay out an amount you purchase if you were to be killed in a vehicle related accident while in a vehicle, as a pedestrian, or as a bicyclist. It also pays by a schedule included in the automobile policy for certain dismemberments, i.e., $5000 for loss of sight or loss of both arms, $2000 for loss of one arm or hand, etc.
Credit card and banks market AD&D as well. The exposure to death is so insignificant, these offers are money makers for those institutions offering them. So easy to purchase–all you have to do is send back the offer from the bank acknowledging you want to accept the offer and they take care of the rest by charging your bank account and having the insurance company send you a certificate verifying the coverage.
There are other institutions who get involved in the marketing of AD&D, i.e., NRA, DAV, Sierra Club, Lutheran Brotherhood, Costco, just to name a few. Since there is no medical underwriting and most solicitors don’t have to go through rigorous licensing, this is a soft market to approach–easy to approach membership of an institution, make an offer available, collect acceptance correspondence, forward to the insurance company, and sit back and collect your finders fee.
Value of AD&D
So what keeps an AD&D product an active player in the insurance industry?
- It provides a psychological benefit to an employee who receives this fringe benefit from his or her company as the company’s way of recognizing the value of an employee to the company. With its low cost but high emotional value, an employer can get a lot of bang for its buck.
- Second, if an individual has a disproportionate exposure to accidents due to travel, occupational hazards, or recreational pursuits, one may consider accidental death as an alternative to carrying a large amount of regular life insurance even though the need for additional death benefit isn’t increased due to death by accident.
- Third, in some circumstances an individual may not be insurable for regular insurance protection, so the purchase of accidental death could at least provide some measure of protection. This coupled with a good tax qualified retirement fund could add considerable stability to financial planning. Since most deaths are not from accidental causes, the main thing you need to secure financial well being for yourself and family is time; and since accidents are a factor, you can control the consequences if the time factor is altered by an accident.
- Fourth, may be just a feel good reason but it is worth considering: It just might have the emotional intrinsic value of going the extra mile. Life insurance coverage to provide for what you should normally cover just doesn’t have quite the psychological impact of going just a step further by purchasing the double indemnity rider when offered by the agent.
It is nice to know this inexpensive tool is available if even for just a small market for life insurance coverages.