Q

What is a life insurance coverage gap and why does it matter?

A

During a coverage gap, you don’t have enough life insurance coverage — which risks your family’s financial health if you die unexpectedly.

Nupur Gambhir

Updated January 7, 2021|9 min read

Editorial disclosure

A life insurance coverage gap occurs when you have too small of a death benefit or none at all. If you die during a coverage gap, the financial consequences for your dependents can be crippling — they likely won’t have the financial support they need to replace your income and pay for bills or everyday expenses. To provide a safety net for your family, you should get life insurance coverage that is proportionate to your financial obligations.

Key Takeaways

  • You should pay your life insurance premiums within the 30-day grace period to prevent a policy lapse

  • During the coronavirus outbreak, insurers may extend the grace period for up to 90 days

  • If your policy is set to expire, explore options for new coverage at least six months before your policy’s expiration date

  • Temporary life insurance coverage ensures your beneficiaries still get a death benefit payout if you die during the life insurance application process

How coverage gaps happen

Allowing a policy to lapse, expire, or simply waiting for a policy to go in force can all play a role in sustaining a life insurance coverage gap. Here’s what you should look out for — and how you can prevent it from happening — to ensure your loved ones are financially secure if you die prematurely.

Policy lapses

If you don’t pay your premiums on time, insurers can cancel your policy. There’s usually a 30-day grace period for late premium payments, but this can be longer during extenuating circumstances. If you delay your premium payments longer than that timeline, your policy will no longer be in force and you’ll lose your life insurance coverage.

How to prevent it: Talk to your insurer

The best way to prevent a policy lapse is to pay your premiums on time, or at the very least, within the insurer’s grace period. If an extenuating circumstance arises that prevents you from paying your premiums, talk to your insurer to see if they have any additional options for you. During the COVID-19 outbreak, some insurers are offering extended grace periods of up to 90 days and payment plans over 12 months if you can prove that the coronavirus pandemic has impacted you financially.

If you can no longer afford your premiums, you can decrease your death benefit amount, which will decrease the cost of your premiums. Because lowering your coverage doesn’t pose any additional risk to the insurer, life insurance companies don’t require any additional underwriting to lower the death benefit amount — though they will require it if you later choose to increase your death benefit amount.

Policy expires and you have no life insurance coverage

Whole life insurance policies last for the duration of your lifetime, as long as you pay the policy premiums. Term policies, however, last anywhere from 10 to 30 years — which is one of the reasons they’re more affordable than whole life insurance and the best policy option for most people.

If you purchase a term length that doesn’t last as long as your needs — if you buy a 10-year policy but have a 20-year mortgage, for example — you’re going to experience a coverage gap.

How to prevent it: Get new coverage six months before your policy expires

If your policy is going to expire soon and you still need life insurance coverage after its end date, there are two ways to ensure that you don’t experience a coverage gap.

Firstly, you could utilize a term conversion rider, which is offered by most insurers. Your second option is to purchase a new policy altogether.

You’ll want to begin the process to get additional coverage at least six months before your policy expires to leave room for any hiccups in the application process and to compare which option is best suited for you. Whole life insurance is far costlier than term insurance and your premiums could increase by five to 15 times the original cost. But the cost of buying a new policy will also change based on your age and health. Giving yourself the time to work with an agent and evaluate where you can get the most affordable policy can end up saving you thousands of dollars in the long run.

Despite the high cost of a whole life insurance policy, it may end up being your best option to extend your coverage. If your age is above an insurer’s maximum or your health poses a large mortality risk, insurers might not be willing to offer you a new policy. By giving yourself ample time to explore your options before your policy expires, you can get the best possible coverage at the best possible price. Whereas if your coverage ends and you’re unable to get a new policy, you can’t go back and convert your expired term life insurance policy to a whole life insurance policy.

Waiting for your policy approval to get coverage

When you begin the application process for life insurance, you don’t have life insurance coverage until your policy is finalized. Even if you’ve received the final policy offer from the insurer, your family won’t receive the death benefit if you die and haven’t yet signed your policy papers and paid your first premium. This can result in a coverage gap from when you initially need life insurance to when you actually have it.

How to prevent it: Get temporary coverage before you get your actual policy

The life insurance application process can take 4-6 weeks — sometimes longer if an insurer needs supplemental information to make you a policy offer. You’re already taking the steps to ensure your family’s financial security, you should create comprehensive coverage and avoid a coverage gap during the application process by purchasing temporary life insurance coverage .

Temporary coverage comes with some coverage restrictions compared to your actual life insurance policy, but it ensures that if you die before your policy is finalized, your loved ones still get some financial protection.

Each life insurance company treats temporary coverage differently and offers a different maximum death benefit.

Common myths that lead to a coverage gap

The life insurance coverage gap exposes families with dependents or debts to a substantial amount of risk. When you’re setting up a financial plan for your family, you might come across a few life insurance myths that perpetuate the problem. Here are a few of the most common misconceptions that often lead to a life insurance coverage gap:

The "I don't need life insurance" myth

Most people know that life insurance can cover end of life costs, such as funeral expenses. What they might not realize is that it’s also an income replacement and can also cover your dependent’s expenses in the long run, such as everyday bills and expenses, mortgage payments, and college tuition.

It’s recommended that you get 10 to 15 times your annual income when buying life insurance for income replacement, according to a 2020 Insurance Barometer Study conducted by Life Happens and LIMRA. This can lead to purchasing an insufficient amount of coverage in proportion to the actual death benefit amount they need.

The "I don't need that much life insurance" myth

If you make $100,000 a year, a million-dollar policy might not seem in line with your family’s financial needs.

But in reality, if you make $100,000 a year, a policy with a million-dollar face amount might be barely enough life insurance coverage. Most people need 10-15 times their income and enough of a death benefit to support their dependents until they ideally wouldn’t need financial support any longer. If you have a newborn, you likely need a policy that lasts at least 18 years. Or if you have a 20-year mortgage, you want your policy to last long enough to cover those mortgage payments.

The graph below can give you an idea of how much coverage you should get based on your income.

INCOMEMINIMUM COVERAGE AMOUNTIDEAL COVERAGE AMOUNT
$50,000$500,000$750,000
$75,000$750,000$1,125,000
$100,000$1,000,000$1,500,000
$150,000$1,500,000$2,250,000
$300,000$3,000,000$4,500,000
$500,000$5,000,000$7,500,000
$1,000,000$10,000,000$15,000,000

Methodology: The minimum face amount is based on a coverage amount that is 10 times your income, and the ideal face amount is based on coverage that is 15 times your income. This doesn’t account for term length and outliers in your individual circumstances.

As your income increases, so does the coverage you need. You can get an idea of the exact coverage you need by checking out our free life insurance coverage calculator or by speaking to a Policygenius agent for free.

Life insurance is meant to be a long-term replacement for your income, so while a death benefit that seems high in proportion to your income might seem excessive, it actually accounts for the financial support your dependents will need for years to come.

The "I already have enough life insurance" myth

If your employer offers life insurance benefits or you have a two-income household, it’s reasonable to assume that you have a contingency plan if you’re no longer around to provide financial support. But more often than not, even with these safeguards in place, losing your income could greatly jeopardize your family’s financial health.

If you split bills, a mortgage, or any other expenses with your partner, losing your half of the household’s financial contribution can put a strain on your partner’s resources. They may have to work more hours, dig into savings, take out a loan, and pay for childcare.

Meanwhile, employer-sponsored life insurance policies rarely offer the amount of coverage people actually need — the median amount of coverage offered is $250,000, which is too low a death benefit for most people. And according to the U.S. Bureau of Labor Statistics, the average person changes jobs 10-12 times in their lifetime. Every time you change jobs, you lose your employer-sponsored life insurance policy, causing a coverage gap.

“This is one of the most common mistakes we see,” says Patrick Hanzel, Advanced Planning Specialist and Certified Financial Planner at Policygenius. “Many people have some form of coverage provided by their employer, but they often don't know for certain how much it is, and also don't realize how little it might actually be. Some employers offer a base benefit amount of something like $50,000 or one year's salary and this is far less than the average recommendation of 10 times your annual income. These types of benefits are also not portable, so if you leave that employer then you risk being left without any coverage at all for your loved ones."

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Consequences of a coverage gap

Why is the coverage gap a big deal when it comes to life insurance? There are two unwelcomed possibilities that can make the life insurance coverage gap gravely consequential.

1. You could die and your family wouldn’t get the death benefit

If your policy expires and you die the next day, your family won’t get the life insurance death benefit. No matter how little time has elapsed since your coverage gap began, if a policy isn’t in force when you die, life insurance companies aren’t obligated to pay out the death benefit to your beneficiaries.

When people are depending on you financially or have to take on your debts, the impact of this can already be financially devastating, but it can sting a little more if you had already spent the last 10 or 20 years paying hundreds in premiums to ensure that this is exactly what wouldn’t happen.

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2. Your health could worsen and you could become ineligible for a new policy

If you’re facing a coverage gap because your policy has lapsed or expired and your health has worsened, it could significantly raise the cost of premiums when you purchase a new policy.

Depending on the severity, a medical condition will generally have an impact on the health classification that an insurer will give you — which means higher premiums — or make you ineligible for life insurance altogether.

Another thing to consider: life insurance gets more expensive with age. So regardless of health, you’re going to see costlier premiums when you buy a new life insurance policy. Preventing a coverage gap not only protects the financial future of your loved ones, but it also ensures you don’t end up paying more for life insurance than you have to.

FAQ

What is a coverage gap?

A coverage gap is when you need life insurance protection, but don’t have enough (or any at all) in place. If you die during a life insurance coverage gap, your loved ones won’t receive the financial support they need from your life insurance company.

At what point does the coverage gap end?

When you have the amount of life insurance coverage that is proportionate to your financial obligations, the coverage gap ends.

How do I prevent a coverage gap?

You can prevent a coverage gap by getting a high enough death benefit and long enough policy term length. Temporary coverage and the term conversion rider can also provide security against incurring a life insurance coverage gap.

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