What Is A Life Insurance Coverage Gap: A Guide To Comprehensive Insurance Protection
Even if you already have an insurance policy or are in the process of getting one, you may experience a coverage gap. If you die during this gap, your family will not be entitled to any death benefit and will be left in a financial bind.
In this guide, we’ll talk about life insurance coverage gaps. We’ll explain what may cause a life insurance coverage gap and what could happen as a consequence. We’ll also share tips on how to prevent and bridge a coverage gap.
Understanding Life Insurance Coverage Gaps
Coverage gaps are periods during your insurance coverage where you have no death benefit. If you die during this period, your family won’t receive any insurance money and will lose out on the financial support your policy is supposed to provide.
Insurance coverage gaps may happen because you underestimate your insurance requirements, leaving “holes” in your coverage where you’re left unprotected. Having too small a death benefit can also cause a gap because it doesn’t cover all of your beneficiaries’ financial needs.
A common cause of insurance coverage gaps is believing in misconceptions about life insurance. Assuming that your insurance is only good for paying funeral expenses is a common life insurance myth, and this leads many people to underestimate their coverage needs.
Another common mistake is assuming that life insurance through your employer is enough. While group life insurance is typically free or very low-cost, it’s balanced by the limited amount of coverage that likely won’t sustain your family for a long time. Not only that, but group life insurance is usually non-portable – you’ll lose coverage when you leave the company.
What Causes Coverage Gaps
In this section, we’ll discuss the three main causes of coverage gaps.
Your Policy Lapses From Nonpayment
To keep your insurance coverage, you need to pay premiums regularly. Most insurers require you to pay them monthly, although you may also have the option to pay premiums annually. If you fail to make your payments when they’re due, the insurer usually gives you a 30-day grace period.
If you still fail to pay premiums after the grace period, your policy will lapse and you’ll lose your insurance coverage. To reinstate your coverage, most insurers will require you to go through underwriting again.
Your Policy Expires
Term life insurance policies provide protection for a certain amount of time, usually between 10 to 30 years. Most people purchase term life insurance because they’re more affordable compared to a whole life policy.
However, there is a caveat to term life insurance. These policies cover you for a certain amount of time before they expire. Once they expire, you won’t receive any more insurance coverage. So if the term you applied for isn’t as long as you need – for example, you have a 20-year mortgage but you only bought a 10-year policy – you’ll end up with a coverage gap.
Your Policy Is Still Being Finalized
Life insurance takes time to be approved. Generally, insurers need 4-6 weeks to process your application. During this period, you may experience a coverage gap because you have no insurance protection. If you die while your application is being processed, your family won’t receive any death benefits.
You Purchased A Small Death Benefit
Many people incorrectly assume that an insurance policy is only designed to cover end-of-life expenses. On the contrary, life insurance can act as a long-term income replacement for your family in your absence. Because you’re replacing years’ worth of income, it’s recommended that your coverage be set at 10 to 15 times your annual income to avoid an insurance gap.
Risks Of A Coverage Gap
While small periods of having no insurance protection may seem inconsequential, there are severe risks associated with insurance coverage gaps. These include:
Loss Of Death Benefit
The main risk of a coverage gap is that your family won’t be eligible for a death benefit. It doesn’t matter whether you’ve had your policy for twenty years or you’re still waiting for the application to be approved, dying during a coverage gap means that your family will receive nothing.
Ineligibility For Another Policy
If you’re looking to reinstate your insurance coverage after your policy expires or lapses, you’ll need to go through underwriting again. Because you’re likely going to have more health issues as you get older, qualifying for insurance protection may be tougher.
Even if you’re still relatively healthy, insurance premiums always increase with age. Due to your age, you’ll likely see higher premiums regardless of your medical condition.
Bridging The Coverage Gap
To prevent coverage gaps from being a problem, here are three tips you can follow.
Pay Your Premiums On Time
You can prevent your policy from lapsing simply by paying premiums on time – or at least within the grace period you’re given. However, if circumstances prevent you from paying on time, you can try talking to your insurer and ask for alternative options.
As a backup plan, you can lower your death benefit which will directly lower your premium costs. Lowering your death benefit requires no extra underwriting, but you’ll need to go through underwriting again if you decide to raise it back to your original coverage amount.
Apply For More Coverage
When your term policy is on the brink of expiring and you still need coverage after it ends, you should purchase more protection. To extend your protection, you can either convert your term policy into a permanent one or purchase a new policy outright.
To ensure that you don’t fall into any coverage gaps, you should start applying for new coverage six months before your policy term ends.
Consider Temporary Coverage
While 4-6 weeks may seem like a short time, you have no way to see what will happen in your future. To keep you protected while your application is being processed, insurers may offer temporary life insurance coverage. This temporary insurance ensures that you’ll receive part of your death benefit if you die before your policy is approved.
Closing Thoughts
While it may seem minor, ignoring a life insurance coverage gap may have dire consequences. If you die during a coverage gap, you’ll leave no death benefit for your family.
To prevent these gaps, you need to ensure that the insurance you have now matches your insurance needs. If you don’t have enough insurance coverage, you should consider applying for more.
Wesley Insurance, LLC is here to help you bridge the life insurance coverage gap! Our professional team will assist you in creating an insurance plan that fulfills your protection needs so you don’t leave any gaps in your coverage. Contact us today for more information!