14.4 Accidental Death & Dismemberment and Supplemental

Accidental Death & Dismemberment and Supplemental

This section covers accident-driven benefits (AD&D and double indemnity), the standardized Medicare Supplement market, and how disability income fits among supplemental products. The exam tests the principal sum / capital sum mechanics and AD&D exclusions heavily.

Accidental Death & Dismemberment (AD&D)

AD&D pays benefits only when loss results from an accident, not sickness. Two key amounts:

• Principal sum — the full benefit, paid for accidental death or for severe losses (such as loss of both hands, both feet, or sight of both eyes).
• Capital sum — a percentage of the principal sum paid for a single dismemberment (e.g., loss of one hand or sight of one eye).

Worked example

An AD&D policy has a $100,000 principal sum. The insured loses sight in one eye in a car accident. The schedule pays 50% — a $50,000 capital sum. If the same accident caused death, it would pay the full $100,000 principal sum.

Double Indemnity and Exclusions

A double indemnity rider on a life policy pays twice the face amount if death results from a qualifying accident (often within 90 days of the accident and before a stated age). It is essentially AD&D attached to life insurance.

Common AD&D exclusions

AD&D is narrow. These losses are typically not covered:

• Death or injury from sickness or disease
• Suicide or intentionally self-inflicted injury
• War or acts of war
• Injury while committing a felony
• Losses from intoxication or illegal drug use
• Aviation other than as a fare-paying passenger

Worked example

An insured has a $250,000 life policy with a double indemnity rider. They die of a heart attack (sickness). The base policy pays the $250,000 face amount, but the double indemnity rider pays nothing because death was not accidental. Had they died in a covered car accident, total payout would be $500,000.

Exam trap

Double indemnity multiplies only the face amount of the base life coverage — it does not double accumulated cash value, paid-up additions, or dividends.

Medicare Supplement (Medigap)

Medicare Supplement (Medigap) plans are sold by private insurers to fill the gaps in Original Medicare (Parts A and B) — deductibles, coinsurance, and copays. They are standardized by letter (Plans A through N); a Plan G from one insurer covers exactly what a Plan G from any other insurer covers, so buyers compare on price and service.

Key rules the exam tests:

• A 6-month open enrollment window opens when a person is 65+ and enrolled in Part B; insurers must issue regardless of health (guaranteed issue).
• Medigap pays secondary to Medicare and does not coordinate with Medicare Advantage — you cannot have both.
• Plans C and F (full Part B deductible coverage) are closed to those newly eligible after January 1, 2020.
• Each Medigap policy covers one person; spouses need separate policies.

Medigap does not include prescription drug coverage; beneficiaries buy a separate Part D plan for drugs. Plans K and L use cost-sharing percentages with an annual out-of-pocket limit rather than full first-dollar coverage, and Plan N uses small copays for office and ER visits in exchange for lower premium. Outside the open-enrollment window, an applicant can be medically underwritten and declined, which is why timing the 6-month window matters so much.

Disability Income as Supplemental

Disability income (DI) replaces a percentage of earned income (commonly 60-70%) when the insured cannot work due to sickness or injury. Core terms:

Taxation rule

If the insured pays premiums with after-tax dollars, DI benefits are tax-free. If the employer pays premiums (and does not include them in income), benefits are taxable. This individual-versus-group distinction is a frequent exam question.

Worked disability example

A worker earning $5,000/month buys an individual DI policy paying 60% of income with a 90-day elimination period and a benefit to age 65. After a covered injury, benefits begin on day 91 at $3,000/month. Because the worker paid premiums with after-tax dollars, the $3,000 is tax-free. Insurers cap replacement below 100% to preserve the incentive to return to work.

Most DI policies pay a residual or partial benefit when the insured returns to work part-time at reduced earnings, paying a proportion of the full benefit based on the percentage of income lost. This bridges the gap between total disability and full recovery and is a common exam point alongside the own-occupation versus any-occupation definitions.