A life insurance coverage gap happens when you have too little life insurance coverage. If you die with gap in your life insurance coverage, your dependents likely won’t have the financial support they need to replace your income and pay for bills and everyday expenses.
To provide a financial safety net for your family, you should get life insurance coverage that covers all of your financial obligations and ensure your coverage is active as long as someone depends on you for support.
Life insurance terms you should know
Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.
Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.
Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.
Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.
Insured: The person who is covered by the insurance policy.
Policy: The legal document that includes the terms and conditions of your life insurance contract.
Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.
Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.
Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.
Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.
Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.
Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.
How coverage gaps happen
Allowing a policy to lapse, expire, or simply waiting for coverage to go become active can all play a role in creating a coverage gap. Here’s what you should look out for — and how you can prevent gaps from happening.
Policy lapse
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. If you don't pay during the grace period, you’ll lose your coverage.
How to prevent it: Talk to your insurer
If you can’t pay your premiums on time, talk to your insurer to see if they have any additional options, like payment plans or extended grace periods, for extenuating circumstances.
If you can no longer afford your premiums, you can lower your death benefit to lower your premiums. Know that if you need to increase the benefit later, you’ll need to go through the whole application process again.
Policy expiration
If you purchase a term life insurance policy that doesn’t last as long as your needs — you buy a 10-year policy but have a 20-year mortgage, for example — you’re going to experience a coverage gap unless you replace your coverage in time.
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.
Shop for a new policy at least six months before your current policy expires.
Use a term conversion rider to convert your term policy into a permanent life insurance policy.
Term life insurance is more affordable than permanent life insurance, but it may be worth considering a permanent policy if you’re older or have a complex health history. Insurers might charge much higher rates or may not be willing to offer you a new term policy. Give yourself time to work with an agent to explore your options.
Delay in policy approval
The life insurance application process can take five to six weeks — sometimes longer if an insurer needs more information to make you a policy offer. That can leave a coverage gap between when you start the process and your policy’s start date.
Even if you’ve received the final policy offer from your insurer, your family won’t get the death benefit if you die without signing your policy papers and paying your first premium.
How to prevent it: Get temporary coverage before you get your actual policy
When you apply for your policy, ask your provider about temporary life insurance coverage. It’s a limited policy offered by your insurer that pays a death benefit if you die before your policy is finalized.
Each life insurance company treats temporary coverage differently and offers a different maximum death benefit.
Learn more about how the life insurance underwriting process works
Common myths that lead to a coverage gap
When you’re setting up a financial plan for your family, you might come across a few life insurance myths that can lead you to create a coverage gap for yourself. Here are a few of the most common misconceptions that leave people underinsured:
‘I don’t need life insurance’
Most people know that life insurance can cover end-of-life costs, such as funeral expenses, and assume they can cover the costs themselves or put off buying a policy. But life insurance is also meant to replace your income so that your loved ones can afford everyday essentials, mortgage payments, and college tuition.
If anyone relies on your financial support or would become responsible for your debts after you die, you should have a policy that can cover your loved ones‘ needs.
‘I don’t need that much life insurance‘
If you make $100,000 a year, a $1 million life insurance policy might seem like too much for your family. This belief can lead people to buy much less coverage than they actually need. In reality, your coverage should equal at least 10 to 15 times your annual income.
Life insurance is a long-term replacement for your income, so that high death benefit actually accounts for the financial support your dependents will need for decades.
Learn more about how much life insurance you need
‘I already have enough life insurance‘
If you split a mortgage or any other expenses with your partner, an unexpected death can strain your finances, even if your employer offers life insurance benefits or you both earn an income.
Your partner may have to work more, dig into savings, or pay for childcare to make ends meet. Meanwhile, employer-sponsored life insurance policies rarely offer the amount of coverage people actually need.
“This is one of the most common mistakes we see,” says Patrick Hanzel, certified financial planner and advanced planning manager at Policygenius. “Many people have some form of coverage provided by their employer, but some employers offer a base benefit amount of something like $50,000 or one year’s salary — far less than the average recommendation of 10 times your annual income.”
Group life insurance is also not portable, Hanzel says, ”so if you leave that employer you risk being left without any coverage at all.”
Consequences of a coverage gap
It’s important to avoid a life insurance coverage gap for two key reasons: Gaps can put your family’s financial support at risk, or they can cause you to pay more for life insurance than you need to.
Your family wouldn’t get the death benefit
If your policy expires and you die the next day, your family won’t get your policy’s death benefit. No matter how little time has elapsed since your coverage gap began, if a policy isn’t active when you die, life insurance companies aren’t obligated to pay out.
You could become ineligible for a new policy
You could face much higher premiums if your coverage gap is due to a lapsed or expired policy. If your health has worsened since you bought your last policy, it can impact the health classification that an insurer gives you — which means higher premiums — or make you ineligible for life insurance altogether.
Preventing a coverage gap not only protects the financial future of your loved ones, but it also keeps you from paying more for life insurance than you have to.
