Dear Dave: My wife and I both work and have been looking at term life insurance policies. A friend says it would be a good idea for us to also have accidental death and dismemberment insurance. Do you agree?
Dear Aiden: You both need good term life insurance policies. Stick with 15-20 year term life insurance and make sure the coverage is separate from anything provided by your employer.
Each of you needs 10 to 12 times your annual policy-covered income. If you earn $50,000 a year, that means you need a policy with coverage of $500,000 to $600,000. The idea of life insurance is to take the place of income. If you or your wife died, the other could invest the insurance money and replace that lost income.
You don’t – I repeat, don’t – need accidental death and dismemberment (ADD) insurance. These policies are cheap, but they are virtually worthless due to the long list of conditions they won’t pay for. Most only pay a small portion for dismemberment, and many won’t pay a death benefit if you die from a medical procedure, medical condition, or drug overdose. The devil is in the details, and AD&D policies are full of them.
If you have long-term disability insurance, which I recommend, you may be covered for a substantial portion of lost income due to injury or disability.
A study indicates that 25% of today’s 20-year-olds will become disabled by the age of 67. In my opinion, these risks are far too high for you to skimp on long term disability insurance, especially when it is very affordable in most cases. If you’re in your prime earning years, a permanent disability could derail your dreams of owning a home, paying for your child’s college education, or having a dignified retirement.
Hope this helps, Aiden!
David Ramsey is a financial consultant, author and radio host.