Having life insurance is a smart choice. Understand different types of policies and be aware of the death benefit.

Life insurance provides invaluable protection for your family in the event of your death. It ensures the ones you care about can continue to support themselves financially when you are gone. Yet a recent study by the Life Insurance Marketing and Research Association revealed that more than half of Americans do not have an individual life insurance policy, and 30% have no life insurance at all.

What is life insurance?

Life insurance pays a specific sum of money upon the death of the insured. The money is paid to the beneficiary, or beneficiaries, named by the policyholder. There are three basic types of life insurance:

How you purchase life insurance coverage is up to you. The Bureau of Labor and Statistics states that 60% of U.S. employers offer life insurance benefits for full-time employees. You may purchase individual life insurance that’s separate from your employer-sponsored benefits, including coverage for your dependents.

Evidence of Insurability

Some insurers ask for proof of good health, or evidence of insurability, before issuing a policy. This may be required if:

The insurance company will want to get a clear picture of your physical condition before agreeing to sell you a policy. They may request medical records or send a nurse to your home to conduct an in-person health screening. The exam will include a measure of your cholesterol, blood sugar, blood pressure, thyroid function, etc.

The insurance company may also review your personal credit history, business credit reports (if you own a business) and criminal background.

Coverage becomes effective once your evidence of insurability is approved.


One of the most important things you must do when purchasing a life insurance policy is designate a beneficiary or beneficiaries. This is the individual or individuals who will receive the benefit in the event of your death.

You may choose to leave the entire death benefit to one person, or you may designate several. If you name more than one beneficiary, you will need to determine the percentage of the death benefit each individual will receive. If you do not, the benefit will be divided equally among them all.

You will also need to designate a secondary or contingent beneficiary, an individual who will receive the benefit if your primary beneficiary is no longer living. Again, if you name more than one contingent beneficiary, you will need to determine the percentage of the death benefit each individual will receive. If you do not, the benefit will be divided equally among them all.

Be sure to provide as much information as possible about the beneficiaries you name. Names, addresses and even Social Security numbers may be required. This makes it easy for the administrator to locate the individuals.

Limitations and Exclusions

There are some instances when life insurance benefits are not paid. Be sure to check your policy for the following exclusions:

Many policies will also include an aviation exclusion. This exclusion only applies to individuals killed while flying in a privately owned aircraft, not a commercial aircraft.

Other policies limit coverage if you are involved in a dangerous activity, such as auto racing, rock climbing, hang gliding, etc. If you do participate in these activities, you may be able to obtain coverage by paying a higher premium.

Riders and Modifications

Some of the most common riders or modifications to life insurance policies include:

Your policy may also include a disability rider. This prevents you from having to pay the premium if you become totally disabled.

Which type of life insurance is right for you?

When deciding which type of life insurance to purchase, there is no one-size-fits-all answer. Everyone has their own answer when it comes to choosing how to protect their family from loss of income. Let’s review the three choices.

Term Life Insurance

With term life, you can often lock in a low premium if you purchase individual coverage when you are young and healthy. This may even be cheaper than the coverage offered by your employer. However, if you aren’t healthy or are having trouble purchasing individual coverage, group insurance may be the way to go.

Whole Life Insurance

If you want to leave a legacy for your beneficiaries, you might want to consider whole life insurance. These policies earn cash value and provide you with a substantial death benefit.

Universal Life Insurance

Like whole life, universal life insurance enables you to build additional cash value. It also offers you flexible options for premium payments, policy loans and long-term financial savings. However, if you are purchasing this coverage late in life, it may not be the right choice for you.

Accidental Death and Dismemberment Insurance

Accidental death and dismemberment (AD&D) insurance only pays benefits if you are killed or injured in an accident. It can be purchased on its own or as a stand-alone policy, or it can be combined with your life insurance.

The accidental death benefit is usually a specific dollar amount (e.g., $10,000) or, if you purchase life insurance through your employer, a multiple of your salary (e.g., two times your salary). The portion for accidental dismemberment varies according to the type of injury you sustain. For example, you may receive the full benefit if you are blinded by an accident, but only 25% of the value of the policy if you lose a finger. The exact payout will be listed in your policy.

AD&D policies have limitations just like life insurance policies. They do not typically cover accidents that result from high-risk activities like skydiving or car racing. Nor do they cover deaths or injuries caused by drug overdoses, driving while intoxicated, complications from surgery or mental illnesses. Check your policy for any excluded activities.

How Life Insurance and AD&D Work Together

Many life policies purchased through your employer offer AD&D coverage at the same benefit level. For example, if your policy offers term life in the amount of $10,000 you may also receive AD&D in the amount of $10,000. In this example, if you died of natural causes, your beneficiary would receive a payment of

$10,000. If you died in an accident, your beneficiary would receive a payment of $20,000 ($10,000 term life plus $10,000 AD&D).

Other group policies allow you to purchase AD&D as a stand-alone product. In this case, you would purchase a dollar amount or multiple of your salary to be paid in the event of your accidental death or an accidental injury covered by the policy. For example, let’s say you have life insurance in the amount of one times your salary ($50,000). You decide to purchase AD&D insurance in the amount of $25,000. If you died of natural causes, your beneficiary would receive $50,000. If you died in an accident, your beneficiary would receive $75,000 ($50,000 term life plus $25,000 AD&D).

In either case, if you were injured as the result of an accident, you would receive the AD&D benefit and the life benefit would remain intact. For example, if you had an AD&D policy in the amount of $25,000 and lost a leg in a car accident, you might receive 75% of the policy amount ($18,750). Your beneficiary would receive nothing.

Do you need both

Often, group term life policies offer AD&D coverage at no additional cost. In this case, it’s clear that you should accept the coverage.

If your employer offers AD&D as a stand-alone product or you are considering purchasing individual coverage, you should factor in your lifestyle when deciding whether to purchase a policy. Are you an avid surfer? Do you ride a four-wheeler every weekend during hunting season? If you answered yes, you may

want to think about AD&D coverage. Even if you are not prone to adventure or rarely participate in activities that put you in unfamiliar situations, accidents happen and you may want to consider the additional safety net AD&D insurance can provide.

Regardless of your lifestyle, combining life insurance and AD&D gives you a more comprehensive benefit and can help protect you and your beneficiaries should you die or suffer a grave injury as the result of an accident.