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

During a coverage gap, you don’t have as much life insurance coverage as you need to replace your income — which can risk your family’s financial health if you die unexpectedly.

Nupur Gambhir

Nupur Gambhir

Published April 28, 2020

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

  • You should begin exploring options for new coverage at least six months before your policy’s expiration date

  • You can purchase temporary life insurance coverage to ensure your beneficiaries still get a death benefit payout if you die during the life insurance application process

A life insurance coverage gap occurs when you have too low of a death benefit or none at all. If you die during a coverage gap, the financial consequences for your dependents can be crippling. To provide a safety net for your family, you should have a certain amount of life insurance coverage in place.

Understanding why and how coverage gaps happen can better prepare you to fix any gaps in coverage you might have or prevent a coverage gap from occurring altogether. Read on to learn more about the implications of not having enough life insurance coverage, and what you can do to make sure your loved ones are financially protected if you die unexpectedly.

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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, and during extenuating circumstances such as a pandemic, these grace periods can be as long as 90 days. But 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: Pay your premiums

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 the course of 12 months if you can prove that the coronavirus pandemic has impacted you financially.

If a situation arises where you can no longer afford your premiums as they currently stand in the long-run, you can always decrease your death benefit amount, which will decrease the cost of your premiums. Because lowering your coverage doesn’t post any additional risk, 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

Permanent 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 permanent life insurance and therefore the best policy option for most people.

But if you purchase a 10-year policy and it expires, even though you still need some life insurance, 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. 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 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. Check out the graph below to get an idea of what type of temporary coverage you could get from the top life insurance companies:

INSURERTEMPORARY POLICY
AIGOffers up to $1,000,000 in coverage with no limitations on the face value of the policy
Banner LifeOffers up to $1,000,000 in coverage but not available on life insurance applications over this amount
BrighthouseOffers up to $1,000,000 in coverage
Lincoln FinancialOffers up to $500,000 in coverage but not available on life insurance applications greater than $3,000,000 or for applicants over the age of 70
Mutual of OmahaOffers up to $1,000,000 in coverage on fully underwritten products and $100,000 on accelerated underwriting products
Pacific LifeOffers up to $1,000,000 in coverage but not available in NY or KS
PrincipalOffers up to $1,000,000 in coverage for underwriting classes of standard or above and up to $100,000 in coverage for underwriting classes below standard
ProtectiveCoverage only available for applicants who are purchasing $1,000,000 policy but not available for applicants leaving the US in the next 60 days or over the age of 80
PrudentialOffers up to $1,000,000 in coverage but not available to applications greater than $5,000,000
SBLISBLI has temporarily ceased offering temporary coverage
TransamericaOffers up to $1,000,000 in coverage for applicants ages 16-65 at underwriting class of standard or above. Offers up to $400,000 of coverage for ages 66-75 at underwriting classes of standard or above. $100,000 in coverage available regardless of age or underwriting class

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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, funeral expenses, and other charges in the short term. 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.

Most financial advisors recommend you need 10x to 15x 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 people to purchase 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, and due to evidence of eligibility, how much coverage you could be permitted to get from insurers.

But in reality, if you make $100,000 a year, a policy with a million-dollar face amount might barely be 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.

Check out the graph below to get an idea of how much coverage you should get based on your income. 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. Keep in mind that this doesn’t account for term length and outliers in your individual circumstance.

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

As your income increases, so does the coverage amount. You can get an idea of the exact coverage you need by checking out our life insurance 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 proportionally high 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 in place 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 support in childcare.

Meanwhile, employer-sponsored life insurance policies rarely offer the amount of coverage people actually need — the median maximum 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, incurring the 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."

Consequences of a coverage gap

Why is the coverage gap a big deal when it comes to life insurance? There are two major 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.

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, there’s a chance this could have serious implications for getting a new life insurance policy.

Depending on the severity, a medical condition will generally have an impact on the health classification that an insurer will give you. While there’s a chance that you’ll receive the same premiums as other people in your age group, it could also get you a low health classification — 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.

Insurance Expert

Nupur Gambhir

Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius in New York City. Previously, she has worked in marketing and business development for travel and tech. She has a B.A. in Economics from Ohio State University.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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