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

Accidental death and dismemberment (AD&D) insurance is insurance—usually added as a rider to a health insurance or life insurance policy—that covers the unintentional death or dismemberment of the insured. Dismemberment includes the loss, or the loss of use, of body parts or functions (e.g., limbs, speech, eyesight, and hearing).

Because of coverage limitations, prospective buyers should carefully read the terms of the policy. For instance, AD&D insurance is limited and generally covers unlikely events. Also, it is supplemental life insurance and not an acceptable substitute for term life insurance.

Understanding Accidental Death and Dismemberment (AD&D) Insurance

AD&D insurance contains a schedule that details the terms and percentages of the various benefits and covered special circumstances. For example, if an insured dies from injuries sustained in an accident, the death must occur within a specified period for benefits to be paid.

Accidental Death

When adding an AD&D rider, also known as a “double indemnity” rider, to a life insurance policy, the designated beneficiaries receive benefits from both in the event the insured dies accidentally. Benefits typically cannot exceed a certain amount. Most insurers cap the amount payable under these circumstances. As most AD&D insurance payments usually mirror the face value of the original life insurance policy, the beneficiary receives a benefit twice the amount of the life insurance policy’s face value upon the accidental death of the insured.

Typically, accidental death covers exceptional circumstances, such as exposure to the elements, traffic accidents, homicide, falls, drowning, and accidents involving heavy equipment.

Dismemberment

Most AD&D policies pay a percentage for the loss of a limb, partial or permanent paralysis, or the loss of use of specific body parts, such as the loss of sight, hearing, or speech. The types and extent of injuries covered are particular to and defined by each insurer and policy. It is uncommon for a policy to pay 100% of the policy amount for anything less than a combination of the loss of a limb and the loss of a major bodily function, such as sight in at least one eye or hearing in at least one ear.

Voluntary AD&D

Voluntary accidental death and dismemberment (VAD&D) insurance is an optional financial protection plan that provides a beneficiary with cash if the policyholder is accidentally killed or loses certain body parts. VAD&D is also a limited form of life insurance and is generally less expensive than a full life insurance policy.

Premiums are based on the amount of insurance purchased, and VAD&D insurance is typically purchased by workers in occupations that place them at high risk of physical injury. Most policies are renewed periodically with revised terms.

How much such a policy pays depends not only on the amount of coverage purchased but also on the type of claim filed. For example, the policy might pay 100% if the policyholder is killed or becomes quadriplegic, but only 50% for the loss of a hand or the permanent loss of hearing in one ear or sight in one eye.

Special Considerations

Each insurance provider includes a list of exclusions. In most instances, the list includes suicide, death from illness or natural causes, and wartime injuries. Other common exclusions include death resulting from the overdose of toxic substances, death while under the influence of nonprescription drugs, and the injury or death of a professional athlete during a sporting event. Usually, if the insured’s loss occurs because of a felonious act on his or her part, no benefit is payable.

Advantages and Disadvantages of AD&D Insurance

Advantages

An accidental death not only impacts the surviving loved ones emotionally but also financially as they now deal with the sudden loss of income. The death benefit from an AD&D policy can add peace of mind by lessening that burden.

Because the loss of income will carry forward, AD&D policies provide a death benefit in addition to the death benefit offered through the traditional life insurance on the insured. The death benefit amount is usually equal to or some multiple of the traditional policy’s death benefit amount. This extra benefit is known as double indemnity as the benefit usually doubles with this added feature.

Because coverage is limited to certain events causing accidental death or loss of limb, premiums are relatively inexpensive. If offered through an employer, participating employees may realize a cost of a few dollars per month. Even when purchased individually, the costs are considerably less than rates for term insurance offering the same face amount.

Disadvantages

This limited coverage can also be disadvantageous to policyholders because it only pays upon certain events. If death occurs outside of these limitations, the AD&D policy does not pay. Premiums paid are forfeited and remain with the insurer. For example, if someone dies from the result of a terrorist attack, no benefit is paid because that is considered a wartime act. Insurers have the ability to make exceptions to this as was done for victims of the 9/11 terrorist attacks in the United States.

The leading cause of death in the United States is due to heart-related issues. Therefore, it is likely that someone will die from natural causes before they die from an accident, especially for those not engaged in risky work and older adults.

If coverage is group or employer-sponsored, it may not be portable if the insured leaves the group or employer. Oftentimes, coverage terminates upon the termination of the insured’s affiliation with the sponsor, leaving them unprotected until new coverage is issued. Also, having AD&D may give policyholders a false sense of security when including the face amount in their cumulative life insurance totals during planning.

Because AD&D only pays upon certain events, it should not be used to determine if a customer’s life insurance portfolio is balanced. Traditional life insurance should be adequate to provide necessary financial support to the beneficiaries. AD&D supplements in the event that death occurs from an accident. It adds an extra benefit for the sudden and unexpected departure of the insured.

The Bottom Line

Accidental death and dismemberment (AD&D) insurance is an insurance policy that pays a death benefit upon the accidental death of an insured or upon the loss of a limb due to an accident. AD&D is purposed to serve as a supplement to regular life insurance as coverage is limited to certain types of accidents. No benefit is payable if the death is due to natural causes or other excludable events. However, AD&D can be a cost-effective way to supplement insurance and provide additional financial assistance to families of the deceased.

What Is an Accidental Death Benefit?

Accidental death benefit is a payment due to the beneficiary of an accidental death insurance policy, which is often a clause or rider connected to a life insurance policy. The accidental death benefit (ADB) life insurance policy usually pays in addition to the standard benefit payable if the insured died of natural causes.

Depending on the policy’s issuer, an accidental death benefit may extend up to a year after the initial accident occurs, provided the accident led to the insured’s death.

Understanding Accidental Death Benefits

Accidental death benefits are riders or provisions that may be added to basic life insurance policies at the request of the insured party. Some people add accidental death benefit riders to their policies to protect their beneficiaries if an accident occurs. This is important as accidents are hard to predict and can lead to financial struggles if a sudden death occurs.

Accidental death benefits are important for people who work in or around potentially hazardous environments. Even those who drive more than average—either professionally or as a commuter—should consider accidental death benefit riders.

As an optional feature, the insured party must pay an additional fee on top of their regular premiums to purchase this benefit. Then, the accidental death benefit increases the payout to a policy’s beneficiary. So essentially the beneficiary receives the death benefit paid by the policy itself plus any additional accidental death benefit covered by the rider. These riders typically end once the insured person reaches a certain age, such as 60, 70, or 80.

What Is Considered Accidental Death?

Insurance companies define accidental death as an event that strictly occurs as a result of an accident. Deaths from car crashes, slips, choking, drowning, machinery, and any other situations that can’t be controlled are deemed accidental. In the case of a fatal accident, death usually must occur within a period specified in the policy.

Some policies’ accidental death benefits may also cover dismemberment—total or partial loss of limbs—burns, instances of paralysis, and other similar cases. These riders are called accidental death and dismemberment (AD&D) insurance.

Types of Accidental Death Benefit Plans

Group Life Supplement

With a group life supplement, the accidental death benefit plan is included as part of a group life insurance contract, such as those offered by your employer. The benefit amount is usually the same as that of the group life benefit.

Voluntary

A voluntary accidental death benefit plan is offered to members of a group as a separate, elective benefit. Offered by your employer, premiums are your responsibility. You generally pay these premiums through regular payroll deductions. Employees are covered for accidents that occur while on the job. Policies pay out benefits for voluntary accident insurance even if the insured party isn’t at work.

Travel Accident

The accidental death benefit plan with travel accident insurance is provided through an employee benefit plan and provides supplemental accident protection to workers while they are traveling on company business. Unlike voluntary accident insurance, the employer usually pays the entire premium for this coverage.

Dependents

Some group accidental death benefit plans also provide coverage for dependents. If you have a spouse or partner, or children who depend on your salary to pay bills and other costs, it may be a good idea to enroll in an accidental death benefit.

This additional insurance could help them out by providing money to pay bills, pay off a mortgage, or provide money to your children for future events, like college. In addition, if you co-own a business, your business partner could be listed on your insurance policy to cover any outstanding debts, in the event of your death.

Example of Accidental Death Benefit

As a hypothetical example, assume you have a $500,000 life insurance policy with a $1 million accidental death benefit rider. If you die due to a heart attack—a natural cause—the insurance company will pay your beneficiary $500,000. If you die as a result of a car accident, your beneficiary will receive the $500,000 life insurance benefit plus the $1 million accidental death benefit for a total payout of $1.5 million.

What Is Advanced Internal Rating-Based (AIRB)?

An advanced internal rating-based (AIRB) approach to credit risk measurement is a method that requests that all risk components be calculated internally within a financial institution. Advanced internal rating-based (AIRB) can help an institution reduce its capital requirements and credit risk.

In addition to the basic internal rating-based (IRB) approach estimations, the advanced approach assesses the risk of default using loss given default (LGD), exposure at default (EAD), and the probability of default (PD). These three elements help determine the risk-weighted asset (RWA) that is calculated on a percentage basis for the total required capital.”

Understanding Advanced Internal Rating-Based Systems

Implementing the AIRB approach is one step in the process of becoming a Basel II-compliant institution. However, an institution may implement the AIRB approach only if they comply with certain supervisory standards outlined in the Basel II accord.

Basel II is a set of international banking regulations, issued by the Basel Committee on Bank Supervision in July 2006, which expand upon those outlined in Basel I. These regulations provided uniform rules and guidelines to level the international banking field. Basel II expanded the rules for minimum capital requirements established under Basel I, provided a framework for regulatory review, and set disclosure requirements for assessment of capital adequacy. Basel II also incorporates credit risk of institutional assets.

Advanced Internal Rating-Based Systems and Empirical Models

The AIRB approach allows banks to estimate many internal risk components themselves. While the empirical models among institutions vary, one example is the Jarrow-Turnbull model. Originally developed and published by Robert A. Jarrow (Kamakura Corporation and Cornell University), along with Stuart Turnbull, (University of Houston), the Jarrow-Turnbull model is a “reduced-form” credit model. Reduced form credit models center on describing bankruptcy as a statistical process, in contrast with a microeconomic model of the firm’s capital structure. (The latter process forms the basis of common “structural credit models.”) The Jarrow–Turnbull model employs a random interest rates framework. Financial institutions often work with both structural credit models and Jarrow-Turnbull ones, when determining the risk of default.

Advanced Internal Rating-Based systems also help banks determine loss given default (LGD) and exposure at default (EAD). Loss given default is the amount of money to be lost in the event of a borrower default; while exposure at default (EAD) is the total value a bank is exposed to at the time of said default.

Advanced Internal Rating-Based Systems and Capital Requirements

Set by regulatory agencies, such as the Bank for International Settlements, the Federal Deposit Insurance Corporation, and the Federal Reserve Board, capital requirements set the amount of liquidity is needed to be held for a certain level of assets at many financial institutions. They also ensure that banks and depository institutions have enough capital to both sustain operating losses and honor withdrawals. AIRB can help financial institutions determine these levels.

What Is Assurance?

Assurance refers to financial coverage that provides remuneration for an event that is certain to happen. Assurance is similar to insurance, with the terms often used interchangeably. However, insurance refers to coverage over a limited time, whereas assurance applies to persistent coverage for extended periods or until death. Assurance may also apply to validation services provided by accountants and other professionals.

How Assurance Works

One of the best examples of assurance is whole life insurance as opposed to term life insurance. In the U.K., “life assurance” is another name for life insurance. The adverse event that both whole life and term life insurance deal with is the death of the person the policy covers. Since the death of the covered person is certain, a life assurance policy (whole life insurance) results in payment to the beneficiary when the policyholder dies. 

A term life insurance policy, however, covers a fixed period—such as 10, 20, or 30 years—from the policy’s purchase date. If the policyholder dies during that time, the beneficiary receives money, but if the policyholder dies after the term, no benefit is received. The assurance policy covers an event that will happen no matter what, while the insurance policy covers a covered incident that might occur (the policyholder might die within the next 30 years).

Types of Assurance

Assurance can also refer to professional services provided by accountants, lawyers, and other professionals. These professionals assure the integrity and usability of documents and information produced by businesses and other organizations. Assurance in this context helps companies and other institutions manage risk and evaluate potential pitfalls. Audits are one example of assurance provided by such firms for businesses to assure that information provided to shareholders is accurate and impartial.

Assurance services are a type of independent professional service usually provided by certified or chartered accountants, such as certified public accountants (CPAs). Assurance services can include a review of any financial document or transaction, such as a loan, contract, or financial website. This review certifies the correctness and validity of the item being reviewed by the CPA.

Example of Assurance

As an example of assurance services, say investors of a publicly-traded company grow suspicious that the company is recognizing revenue too early. Early realization of revenue might lead to positive financial results in upcoming quarters, but it can also lead to worse results in the future.

Under pressure from shareholders, company management agrees to hire an assurance firm to review its accounting procedures and systems to provide a report to shareholders. The summary will assure shareholders and investors that the company’s financial statements are accurate and revenue recognition policies are in line with generally accepted accounting principles (GAAP).

The assurance firm reviews the financial statements, interviews accounting department personnel, and speaks with customers and clients. The assurance firm makes sure that the company in question has followed GAAP and assures stakeholders that the company’s results are sound.

Assurance vs. Negative Assurance

Assurance refers to the high degree of certainty that something is accurate, complete, and usable. Professionals affirm these positive assurances after careful review of the documents and information subject to the audit or review.

Negative assurance refers to the level of certainty that something is accurate because no proof to the contrary is present. In other words, since there is no proof that the information is inaccurate or that deceptive practices (e.g., fraud) occurred, it is presumed to be accurate.

Negative assurance usually follows assurance of the same set of facts and is done to ensure that the first review was appropriate and without falsifications or gross errors. Therefore, the amount of scrutiny is not as intense as the first review because the negative assurance auditor purposefully looks for misstatements, violations, and deception.

Assurance FAQs

What Does Life Assurance Mean?

Assurance has dual meanings in business. It refers to the coverage that pays a benefit for a covered event that will eventually happen. Assurance also refers to the assurance given by auditing professionals regarding the validity and accuracy of reviewed documents and information. These auditors exercise great care to make these positive assurances.

What Is an Example of Assurance?

Whole life insurance is perhaps one of the best-understood examples of assurance. As long as the policy remains in force, this type of insurance guarantees to pay a death benefit at the death of the insured, despite how long that event takes to occur.

What Is Meant by Assurance in Auditing?

Assurance in auditing refers to the opinions issued by a professional regarding the accuracy and completeness of what’s analyzed. For example, an accountant assuring that financial statements are accurate and valid asserts that they have reviewed the documents using acceptable accounting standards and principles.

What Is the Difference Between Life Insurance and Assurance?

Life insurance and life assurance are often used interchangeably and sometimes refer to the same type of contract. However, life insurance is coverage that pays a benefit for the death of the insured if the death occurs during the limited, contractual term. Assurance or life assurance is coverage that pays a benefit upon the death of the insured despite how long it takes for that death to occur.

What Kind of Company Is an Assurance Company?

An assurance company could be a life insurance/assurance company providing benefits upon the certain death of the insured, but commonly refers to an accounting or auditing firm providing assurance services to businesses and organizations. These services include complete and intense reviews of documents, transactions, or information. The purpose of these reviews is to confirm and assure the accuracy of what was reviewed.

The Bottom Line

Assurance is coverage that pays a benefit upon the eventual occurrence of a certain event. It also refers to a service rendered by a professional to confirm the validity and accuracy of reviewed documents and information. Assurances in auditing can help companies address risks and potential problems affecting the accuracy of their reporting. On the contrary, negative assurance is a less intense review that also provides a form of assurance. Negative assurance asserts that what was reviewed is accurate because nothing contradicting this claim exists.