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Most Americans rely on insurance policies as their primary financial safety net.
Unfortunately, what most people don’t realize is that different types of insurance policies offer different levels of protection. Two often confusing policies are personal accident insurance and life insurance.
Both policies are critical components of a well-rounded insurance portfolio, but they are not interchangeable. Understanding the differences between the two creates an important foundation for making informed insurance choices.
This article will compare and contrast personal accident insurance and life insurance. We will discuss the benefits of each policy and when it might make sense to purchase one or the other.
Bottom Line Upfront
The main difference between personal accident insurance and life insurance is that personal accident insurance pays out only if an accident occurs. On the other hand, life insurance pays out when a person dies, regardless of the cause.
Both platforms have unique benefits that could make them valuable to your insurance portfolio. Keep in mind that there is also a difference between whole life insurance and term life insurance.
The Main Differences Between Personal Accident Insurance and Life Insurance
- Personal accident insurance pays out only if an accident occurs, whereas life insurance pays out according to the terms of the policy when a person dies, regardless of the cause.
- Life insurance provides for investments options and cash value growth (if it is whole life insurance vs term life insurance that does not), whereas personal accident insurance only insures against death or dismemberment.
- The key premium determinants for life insurance are usually health, age, smoking, and occupation, whereas personal accident insurance bases its premium on the activities you do and the sum assured.
- Life insurance has more stringent underwriting requirements and medical exams, whereas personal accident insurance does not require a medical exam.
What is Personal Accident Insurance?
Personal accident insurance is a policy that covers death or disablement as a result of an accident. The policy states that if the holder dies or sustains bodily injuries caused by external visible and violent means, the insurance company will pay a predetermined amount of money outlined in the policy.
An unexpected accident is traumatic for the victim and can also be financially devastating. Medical bills and funeral costs can quickly add up, and if the victim cannot work, he may lose income. A personal accident insurance policy can provide financial relief in these difficult times.
Types of Personal Accident Insurance
Below are the two types of personal accident insurance;
- Individual accident insurance: This policy covers the individual facing the accident.
- Group accident insurance: This policy covers a group of people, usually employees, against accidental injuries.
Cost of Personal Accident Insurance
Data from the Agency for Healthcare and Research Quality reveals that the average cost of an emergency department visit in the United States was $530 in 2017. This figure can be higher or lower depending on the severity of the injuries and whether or not the victim is admitted to the hospital.
Inpatient stays are much more expensive, with an average cost of $11,700. In cases where the victim requires long-term rehabilitation, the cost can be even higher.
A personal accident insurance policy can help alleviate this financial stress by providing a lump sum payment to the policyholder. The payout size will depend on the policy, but holders can use it to cover any expenses related to the accident, including medical bills, lost income, and funeral costs.
The amount you pay as a premium for personal accident insurance can vary depending on the insurer. The costs can range between $5 to $50 per month for an individual policy. Some personal accident insurance policies cover specific incidences and injuries, such as paralysis or dismemberment, while others are more comprehensive and cover a wider range of accidents.
Some policies will allow you to add additional coverage for activities such as extreme sports, cosmetic surgery, or hazardous occupations for an additional premium. Choosing the right policy and coverage limit is essential to getting the protection you need.
See also: How to Find the Best Medical Insurance
Incidents Covered by Personal Accident Insurance Plans
Personal accident insurance plans vary in the types of accidents they cover. Some plans will only cover accidental death or disabling injuries, while others will also cover less severe accidents, such as broken bones.
Below are some of the most common incidences covered by personal accident insurance plans:
- Accidental death cover
- Temporary total disability
- Permanent total disability
- Permanent partial disability
- Carriage of the dead body
The cover provided by personal accident insurance policies can vary depending on the insurer, so it is important to read the policy document carefully to understand what is and is not covered.
Benefits of a Personal Accident Insurance Policy
There are several benefits to having a personal accident insurance policy:
- Ensures financial security
- Extensive coverage
- Flexible policies
- Easy to claim
- Customizable policies to suit your needs
What is Life Insurance?
Life insurance is a contract between an insurance policyholder and an insurer. The insurer agrees to pay a designated beneficiary a sum of money (the “death benefit”) for a premium upon the insured person’s death.
The insurance policyholder typically pays premiums, either annually or monthly, depending on the life insurance they purchase. For the policy to be viable, the policyholder must disclose any material facts about their health and lifestyle to the insurer.
Types of Life Insurance
The two types of life insurance are term life insurance and permanent life insurance.
- Term life insurance: A policy that provides coverage for a fixed period, usually 10, 20, or 30 years. If the policyholder dies during the policy term, the beneficiary will receive the death benefit. If the policyholder survives the policy’s term, there is no payout, and the policy is canceled.
- Permanent life insurance: A policy that provides coverage for the rest of the policyholder’s life. If the policyholder dies, the beneficiary will receive the death benefit.
How Much Life Insurance Do I Need?
The amount of life insurance you need depends on your circumstances. Factors to consider include your dependents, debts and liabilities, income, and the length of time your family will need financial support.
A general rule of thumb is to purchase a life insurance policy 10-12 times your annual income. However, this is just a rough estimate, and you should speak to a financial advisor to get a more accurate picture of the coverage you need.
Benefits of Life Insurance
There are several benefits to having life insurance:
- Ensures financial security for your loved ones
- It’s an investment tool
- Can help pay off debts and liabilities
- Beneficiaries can use it to fund education costs
- Tax-advantaged savings (Life insurance is tax-free)
- Supplement retirement savings
- It can cover final expenses
See also: How to Find the Best Life Insurance
Differences Between Personal Accident Insurance and Life Insurance Policy
Now that we have looked at what personal accident insurance and life insurance are, let’s take a more detailed look at the key differences between the two:
1. Coverage
Personal accident insurance provides coverage for accidental death and disablement due to an accident. It does not cover natural causes of death such as illness or diseases or death resulting from self-harm.
On the other hand, life insurance provides coverage for death due to any cause. However, most companies will not pay out if the death is suicide in the first two years of the policy.
2. Purpose
Personal accident insurance is mainly intended to provide financial security in an accident or loss of income to the policyholder.
Life insurance is mainly intended to provide a lump sum payment to the beneficiary in the event of the policyholder’s death. However, some life insurance policies also have an accidental death benefit that pays out if the policyholder dies due to an accident.
3. Premium Determinants
Life insurance premiums are mainly determined by the age and health of the policyholder, while personal accident insurance premiums are mainly determined by the type and amount of coverage purchased.
Other factors such as occupational hazards or dangerous hobbies can also affect the premiums for personal accident insurance. Some insurers may also require a medical exam before selling a personal accident insurance policy.
4. Length of Coverage
Life insurance can either be term life insurance or permanent life insurance. Term life insurance provides coverage for a fixed period, usually 10, 20, or 30 years. If the policyholder dies during the policy term, the beneficiary will receive the death benefit.
Permanent life insurance provides coverage for the rest of the policyholder’s life. If the policyholder dies, the beneficiary will receive the death benefit. On the other hand, personal accident insurance only provides coverage for a limited period, usually one year.
5. Investment Options
Personal accident insurance does not provide variable universal life insurance options, allowing the policyholder to invest the policy’s premiums in various investment options.
Life insurance does provide for variable universal life insurance options, which allows the policyholder to invest the policy’s premiums in various investment options. This option can be a valuable feature if the policyholder wants to use life insurance as an investment vehicle.
6. Renewal
Personal accident insurance policies are renewable through mutual agreement between the insurer and the policyholder. The policy is subject to a revision of terms and conditions at renewal. The renewal may increase the premium, decrease the sum insured, or both.
Most term life insurance policies are renewable at the end of the term, but the premiums will be higher than the initial premiums. Some insurers also offer the option to convert a term life insurance policy to a permanent life insurance policy at the end.
7. Exclusions
Personal accident insurance policies usually have more exclusions than life insurance policies. These exclusions can vary from insurer to insurer but can include death from natural causes, self-harm, and injury or illness not resulting from an accident.
Life insurance policies usually do not have as many exclusions as personal accident insurance policies. The main exclusion is death from suicide in the first two years of the policy.
See also: Geico vs State Farm Insurance
Why You Should Buy Both Personal Accident Insurance and Life Insurance
While personal accident insurance and life insurance both have their advantages, there are several reasons why you should consider buying both types of coverage.
1. You Get More Coverage
When you buy both personal accident and life insurance, you get more coverage than if you only bought one type of policy. For example, most personal accident policies only provide coverage for a limited period, usually one year. If you only have a personal accident policy and die after the policy expires, your beneficiaries will not receive any death benefits.
2. You Get More Financial Security
When you buy both personal accident and life insurance, you and your family get more financial security in the event of your death or an accident. If you die, your life insurance policy will pay out a death benefit to your beneficiaries. And if you are injured in an accident and can’t work, your accident insurance policy will pay out a monthly benefit to help cover your living expenses.
3. Ability to Customize Your Coverage
You can also customize your coverage by buying personal accident and life insurance. For example, if you are a high-risk driver, you may want to buy a life insurance policy with a lower death benefit to afford the premiums. But you may also want to buy an accident insurance policy with a higher sum insured, so you are covered in the event of an accident.
4. You May Get a Discount
You can get a discount on your premiums if you buy personal accident and life insurance. Depending on the insurer, you may be eligible for a discount of up to 10% on your premiums. The best way to find out is to compare quotes from different insurers.
5. Peace of Mind
There’s nothing more important than peace of mind. And when you have personal accident and life insurance, you can rest assured knowing that you and your family are financially protected in your death or an accident.
How to Choose the Right Policy
When shopping for personal accident or life insurance, choosing the right policy for your needs is important. Here are a few tips to help you make the right decision:
- Consider Your Needs: Before you buy any insurance policy, you need to consider your needs. What are you trying to protect? How much coverage do you need? What are the exclusions?
- Compare Quotes: It’s essential to compare quotes from different insurers before buying a policy. Comparing quotes will help you find the best deal and ensure you get the coverage you need.
- Read the Fine Print: Make sure you read the fine print before buying a policy. The fine print should include all the policy details, including the coverages, exclusions, and limitations.
- Seek professional advice: If you are unsure about what type of policy to buy, it’s always good to seek professional advice from an insurance broker or agent. An expert in the field can help you understand your needs and find the right policy for you.
Personal Accident Insurance vs. Life Insurance (FAQs)
Answer: Personal accident insurance provides financial protection in the event of an accident. It can help you cover medical expenses, lost wages, and other costs associated with an accident. Most policies also provide death benefits in the event of a fatal accident.
Answer: The most significant benefit of life insurance is that it provides financial protection for your loved ones in the event of your death. A life insurance policy can pay out a lump sum or monthly benefit to your beneficiaries, which can help them cover expenses like funeral costs, mortgage payments, and living expenses.
Answer: The main difference between personal accident insurance and life insurance is that personal accident insurance only provides coverage in death or an accident. In contrast, life insurance provides coverage in the event of death from any cause.
Answer: Life insurance is typically more expensive than personal accident insurance because it provides a broader range of coverage. However, there is a range of life insurance policies available, so you can find one that fits your budget.
Answer: Personal accident insurance premiums do not increase with age. The premium is the same for everyone, regardless of age.
Conclusion
Personal accident insurance and life insurance are both important policies to have. They provide financial protection in the event of an accident or death. If you are unsure which policy is right for you, it’s always best to seek professional advice.
However, if you were to choose one policy over the other, I recommend life insurance because it provides a broader range of coverage, including a death benefit from any cause.
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