Difference Between Life Insurance and Accidental Death Coverage

You want to know your loved ones are financially secure in the event of your death, but what kind of insurance will best protect them? There are two broad categories of insurance plans that offer Canadians end of life protection: life insurance and accidental death insurance. Often, these products are thought of interchangeably, but each comes with distinct features and benefits designed to suit specific needs. 

It’s important to understand the difference so that you can choose the policy that’s the right fit. To help you make the best decision for your family’s future, we’ve outlined the differences between life insurance and accidental death coverage and how they can provide you with the peace of mind you and your loved ones deserve.

Key takeaways

• Both life insurance and accidental death insurance helps provide peace of mind by ensuring that your family will be looked after financially in the event of your death.
• These two types of insurance products are often viewed as interchangeable when in fact, they’re different in important ways that policy holders need to understand.
• Life insurance pays out a death benefit when death occurs for a variety of reasons (e.g. accident, illness, or old age) so long as the policyholder dies while their policy is still active.
• Accidental death insurance pays out benefits only if the policyholder dies in an accident or dies within one within one year from injuries caused by an accident only. 
• Accidental death insurance is often more affordable and charges lower premiums due to its limited scope of coverage.

What is life insurance?

Let’s start with an overview of life insurance and why it might be the right option for long-term coverage and financial security for your loved ones. Life insurance provides a one-time, tax-free payment in the event of your death. However, life insurance products aren’t one-size-fits-all solutions — they’re tailored to suit your budget and your goals.

Types of life insurance

Canadians have access to both term life insurance plans and permanent life insurance. Here’s how they differ:

• Term life insurance:  This is a type of life insurance that provides you with coverage over a defined period decided upon when you purchase your plan. Term life insurance policies can range from 10 to 40 years, depending on your needs. The beneficiaries named in the policy (your family and loved ones) receive a death benefit payout if the policyholder dies within the term protected by the policy’s coverage.

• Permanent life insurance: Permanent life insurance plans also offer death benefit payouts to beneficiaries, but they are not limited to a specific term. One way to think about the difference is that term life insurance policies offer a death benefit if you die (during the insured term) while permanent life plans provide death benefit payouts when you die, regardless of when that occurs. While premiums are typically higher on permanent life insurance plans, some may offer a stream of money that accumulates in the policy as you pay your premiums.

Key features of life insurance coverage

The must-know basics behind life insurance and the key features that this kind of coverage offers are:

• Coverage is comprehensive: Your life insurance plan covers death due to illness, natural causes, or accidents (limitations may apply).
• Policies are customizable: Talking to your advisor will help you tailor a plan to fit your specific needs. For example, you may wish to include riders that cover you in the case of critical illness or disability.
• Certain policies offer a cash value component: Some permanent life insurance policies build cash value over time and give you the option to either withdraw funds from this component of your plan or borrow against its value.
• Benefits are typically tax-free: In most cases, death benefit payouts are not subject to income tax.

What is accidental death coverage?

Accidental death insurance — also referred to as Personal Accident insurance — is a type of coverage that provides your beneficiaries with a payout in the event that you die from an accident. Coverage is limited to these specific situations but is also more affordable than a life insurance policy. For RBC clients between the ages of 18 and 69, acceptance into a Personal Accident insurance policy is guaranteed.

Key features of accidental death coverage

Here’s what you need to know about accidental death coverage:

• Coverage is accident-specific: Beneficiaries will only receive a death benefit payout in the event of accidental death or if you die within one year from injuries caused by an accident only. 
• This type of insurance is often purchased as supplemental coverage: Accidental death policies are often purchased as a rider to a life insurance policy, but can be purchased as a standalone plan.
• Plans offer lower premiums: Because the coverage offered by accidental death insurance is more limited and only applicable to specific situations, it’s usually more affordable than life insurance.
• Policies do not come with a cash value component: Accidental death policies have no cash value component and are not a financial tool that helps build savings or contributes to your investment portfolio.

Key differences between life insurance and accidental death coverage

Here’s the most important differences between life insurance and accidental death coverage at a glance:

Why get life insurance?

With an active term life or permanent life insurance policy, you can be assured that your loved ones will have a financial safety net when you die. These policies and plans are designed to provide short- or long-term security and can, depending on the type of policy, also contribute to wealth building.

Here are some of the reasons why life insurance could be the right kind of coverage for you and your family:

• You’re a working parent with children or dependents: For parents and guardians with children or other financial dependents living at home, life insurance coverage provides ease of mind, knowing that if something were to happen to you, your beneficiaries will be able to cover unexpected costs like additional childcare, household bills, or funeral expenses.

• You have sizable debts like a mortgage or student loans: If you’re making regular payments on loans, lines of credit, or a mortgage, life insurance will allow your spouse or family to continue paying off those debts without worry.

• You’re saving to pay for your child’s education: One financial strategy for funding a child’s education beyond a RESP is to dedicate the cash value component of a permanent life policy to university or college tuition. This can be accomplished by purchasing a plan for your child and transferring it to them when they come of age.

• You’re working to protect your assets and pass them on to your loved ones: You want your loved ones to be able to keep the things we worked hard to give them — like the family home or cottage on the lake. Your life insurance death benefit supports your beneficiaries financially so that they can afford to pay property taxes or other fees on these assets.
• You want your family to receive a death benefit payout that won’t be subject to tax: Life insurance death benefit payouts, including the cash value component of your policy are, for the most part, not taxed when they are passed on to your beneficiaries following your death.   

Why get accidental death coverage?

Accidental death coverage offers a more affordable way to protect your family if you experience an accident resulting in death. It could be the right policy option for you and your loved ones if:

• You’re someone who works in a high-risk industry: Certain occupations like construction, transportation, and manufacturing can put workers at higher risk of accidents or fatalities.
• Your hobbies involve a higher chance of accident or injury: Rock climbing, mountain biking or jet skiing typically involve more risk than practicing yoga. People who love high-octane activities may want to consider accidental death insurance to protect themselves. However, it’s important to note that it may not cover every high-risk hobby. Reckless activities or activities that break the law are excluded. For example, while low altitude rock climbing might be covered by your policy, free climbing in the Alps without ropes may not. 

• You’re a young adult who wants low-cost insurance coverage: If life insurance is beyond your budget as a young adult, a more affordable AD&D policy could be the right option for you at this stage of your life.

• You already have a life insurance policy, but you want additional coverage: Some life insurance policy holders opt for an additional accidental death rider that provides an extra layer of security in the face of an unexpected accident.
• You don’t qualify for life insurance: As accidental death insurance typically does not require a medical exam, it can be a good option for Canadians who cannot be approved for traditional life insurance. At RBC, acceptance into an accidental death policy is typically guaranteed if you are an RBC customer between the ages of 18 and 69 and a Canadian resident. No medical exam is required.

Why combine life insurance and accidental death coverage?

Combining life insurance with accidental death coverage provides an additional layer of security for your loved ones and offers peace of mind knowing that your family will be financially supported in the face of an accident resulting in death. Combining these two products is also a cost-effective way to obtain additional coverage because accidental death insurance can be tacked on to your life insurance policy as a rider — typically at a lower rate than if you purchased the policy separately.

How to combine life insurance and accidental death coverage

There are two ways to combine the protection offered by life insurance and accidental death coverage. Life insurance policyholders can request that an accidental death rider be added to their plan. Or, for more personalized coverage tailored to your specific needs, you can purchase a separate policy. Ask your insurance advisor for guidance on which option best suits your goals and requirements. 

Extra protection for you and your loved ones

While life insurance and accidental death coverage do share some commonalities, they are separate and different insurance products that offer you and your loved ones varying levels of protection. Life insurance offers comprehensive protection and long-term benefits, while accidental death coverage provides affordable, accident-specific protection. Your insurance advisor can help you to choose the right policy — or combination of policies — to ensure financial security for you and the people you love most.  

Frequently Asked Questions (FAQs) about Accidental Death Coverage vs Life Insurance

Is accidental death coverage the same as life insurance?

No, these are two separate insurance products that offer different levels of protection. Life insurance is a comprehensive, short- or long-term type of coverage that comes with higher premiums, while accidental death coverage is more affordable but only offers protection against specific circumstances.

If I have life insurance, am I covered if I die accidentally?

Most term and permanent life insurance plans do cover accidental death. Your insurance provider can offer you a list of potential exclusions. 

Can I have both life and accidental death coverage?

Yes. Combining these two types of coverage offers an additional layer of financial security for your family.

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