14.4 Accidental Death & Dismemberment and Supplemental

Accidental Death & Dismemberment (AD&D)

AD&D insurance pays a benefit only when death or specified bodily losses result from an accident — never from sickness or natural causes. It is built around two amounts:

• The principal sum — the full face amount, paid for accidental death or for the loss of two or more members (e.g., two limbs, both eyes, or one limb and one eye).
• The capital sum — a percentage of the principal (commonly 50%), paid for the loss of one member (one hand, one foot, or sight in one eye).

"Loss" of a limb generally means severance at or above the wrist or ankle; loss of sight means total and irrecoverable loss. AD&D is frequently sold as a rider on a life policy (the "double indemnity" provision pays an extra death benefit equal to the face amount if death is accidental).

Worked example. A worker has a $200,000 AD&D policy. The principal sum is $200,000 and the capital sum is 50% = $100,000. If the worker loses one hand in an accident, AD&D pays the capital sum of $100,000. If the worker loses both hands, AD&D pays the full principal sum of $200,000. If the worker dies of a heart attack, AD&D pays $0 — death was not accidental.

Most AD&D contracts require death to occur within 90 days (sometimes 180) of the accident and exclude losses from war, suicide, self-inflicted injury, illegal acts, and aviation other than as a fare-paying passenger.

Why AD&D Supplements (Never Replaces) Life Insurance

AD&D is inexpensive precisely because it pays in narrow circumstances — accidental loss only. Because the vast majority of deaths are from illness or natural causes, AD&D should layer on top of a life policy, not stand in for it. The exam frames this as: AD&D is a limited form of coverage; an agent who replaces whole life with cheap AD&D has likely committed a suitability violation.

Other Supplemental and Group Coverages

• Travel accident and common-carrier policies are AD&D variants limited to a covered trip or to fare-paying carrier passengers.
• Medicare Supplement (Medigap) pays the deductibles and coinsurance Original Medicare leaves to the beneficiary; standardized plans (A-N) are guaranteed-issue during the 6-month open enrollment beginning at age 65 and Part B enrollment.
• Disability income riders and supplemental accident plans round out the supplemental category.

Tax Note

Benefits from individually owned accident-and-health and AD&D policies are generally received income-tax-free by the insured, because premiums are paid with after-tax dollars and the benefit indemnifies a loss rather than producing gain.

Dismemberment Schedules and Accident-Only Plans

AD&D policies attach a schedule of losses that ties each covered loss to a percentage of the principal sum. A frequent exam point is that some severe single losses — such as the loss of speech, hearing in both ears, or both feet — pay the full principal sum even though no death occurred, while lesser single losses pay the capital sum. The contract also defines accidental means (the cause was unexpected) versus accidental results (the outcome was unexpected); modern policies generally use the broader accidental-results standard.

Related accident-only health plans pay benefits exclusively for losses arising from an accident, never from sickness. They commonly bundle:

• An accidental death benefit (a lump sum to a beneficiary).
• A dismemberment schedule (principal/capital sums).
• Accident medical expense reimbursement for treatment.
• An optional accident disability income benefit while the insured cannot work.

Because they exclude illness entirely, accident-only plans are inexpensive but leave a large gap, so they are sold as supplements to comprehensive coverage.

Medicare Supplement (Medigap) Mechanics

Medigap plans are standardized into lettered plans (A through N) sold by private insurers to fill Original Medicare's cost-sharing — the Part A deductible and coinsurance, Part B coinsurance, and, on some plans, skilled-nursing coinsurance and foreign-travel emergency care. Since 2020, Plans C and F (which paid the Part B deductible) are closed to those newly eligible.

The 6-month Medigap open-enrollment period begins when the beneficiary is 65 and enrolled in Part B; during it, coverage is guaranteed issue with no medical underwriting. Medigap pays nothing until Medicare has adjudicated the claim, and a beneficiary may hold only one Medigap policy — selling a second is an illegal duplicate sale. Medigap does not cover long-term custodial care, dental, vision, or hearing aids, which is why LTC and the supplemental products in this chapter remain necessary alongside it.

Accidental Death & Dismemberment Benefit Schedules

AD&D pays only for losses caused by accident, never sickness, and uses two defined amounts:

• The principal sum — paid for accidental death or for the loss of two or more members (any two of: a hand, a foot, sight in an eye).
• The capital sum — a percentage of the principal sum (often 50%) paid for the loss of one member.

Worked example: A $200,000 AD&D policy (principal sum) pays the full $200,000 for accidental death or loss of two limbs, but the capital sum — say $100,000 (50%) — for the loss of one hand. Many AD&D coverages add a double indemnity while traveling as a fare-paying common-carrier passenger.

Trap: AD&D excludes death by illness, suicide, war, and self-inflicted injury; "dismemberment" means severance (or loss of use, if the contract so states), and losses generally must occur within 90 days of the accident.