Accident Insurance: The Fundamentals

Accident insurance is insurance coverage that provides a benefit in the event of an accident. The common type of coverage is known as Accidental Death and Dismemberment Insurance. The benefit payable is based on loss that occurs, which was accidental in nature, resulting in the death of the insured or the loss of limbs.

There are fundamental terms and concepts associated with accident insurance that is the same as for all types of insurance. Any insurance coverage is design to restore to its original value an insured due to any risk that results in a loss or reduction in value. This restoration due to loss is based on the principle of indemnification. The purpose of insurance is not to produce a gain but protect against loss with no gain, which is a pure risk.

Types of Policies

The most common type of policies are Accidental Death and Dismemberment or AD&D. AD&D coverage either are sold as standalone policies or can be included as a rider to an individual or group life insurance policy.

When included as a rider to a life insurance policy, the benefit payable to the insured’s beneficiaries is usually 2 times the face amount or death benefit of the policy. This is referred to as double indemnity.

Definition of Accident

An accident is defined as any event, which causes loss for which the results were unforeseen. This is known as an accidental bodily injury test for accidents. This differs from the more stringent definition known as accidental means test. With accidental means testing, the insured not only did not know the risk was going to produce a loss but also was not aware that the events leading to the risk were going to produce a loss.

We think of accidental means as being the “cause and effect” test while the accidental bodily injury test as being the “results only” test. If you were to fall off a ladder you knew had a loose rung, under the cause test, no benefit would be payable if you fell and injured yourself. The standard applied would be that you should have known that climbing the ladder would have caused injury. Under the results test, climbing the same ladder would result in benefits being payable if you did not intend to be injured as a result.

Principal Sum Payments

AD&D policies pay a principal sum or benefit amount to the insured or insured’s beneficiaries in the case of death. The principal sum is the stated face amount of the policy.

Benefits are payable if death were to occur because of the accident or the insured were to suffer the loss of any 2 limbs, sight, speech or hearing.

Capital Sum Payments

A smaller capital sum is payable in the event of an accident that results in the loss of a limb or partial loss of hearing or sight. The smaller capital sum is typically up to half of the principal sum payable.

In addition to AD&D policies, there are individual and group accident and sickness plans, which operate under the same premise as AD&D. The accident and sickness plans pay a benefit to cover medical expenses, typically short-term in nature, due to injury or illness that occurs based on an accident. This type of plan when issued individually can cover accidents occurring on an occupational basis, both on and off the job or when issued as a group plan, on a non-occupational or off the job only. Worker’s compensation plans are used to cover accidents occurring on the job in a group setting.

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