Understanding Grace Periods

When many people think of grace periods, they think of them in terms of credit cards. A credit card grace period is the time between when a payment is due and when interest is charged. Some consumers may interpret grace periods as extended due dates, but this is not the case. A payment is due when a payment is due. The purpose of a grace period is to offer a flexible safety net, should you need it. This need may arise from unforeseen circumstances, like a natural disaster or hospitalization, or being laid off. It shouldn’t be seen as an option available for convenience.

The life insurance industry has its own state-regulated definition of what a grace period is and how an after-grace-period premium payment affects a policy. For life insurance policy owners, it is important to know the guidelines surrounding grace periods and how to best utilize this safety net, should it be needed.

Life Insurance Payments and Grace Periods

As stated before, a payment is due when a payment is due, but sometimes unforeseen situations take place, and a payment is late as a result. Many life insurance companies will allow a period of time, usually 30 to 60 days depending on the product type and state regulations, between the payment due date and when coverage eventually lapses for nonpayment of premiums. This window of time is considered a grace period. These periods are built in safety nets that ensure a policy originally in good standing does not lapse and that the insured does not lose coverage over an accidental late payment made within a set amount of time.

While it may be tempting to write off a grace period as just extra time to pay a premium payment, it’s a good idea to make all payments on time and use grace periods sparingly and only when absolutely needed. A mistake that results in missing a payment altogether could mean a lapse or even the cancellation of a policy, not to mention that different companies have different ways of handling this situation. To that end, it’s important to read the fine print of your insurance policy and know what grace period you are offered. When in doubt, check your policy or call a Customer Service representative to make sure you have the most accurate information.

Missing a Payment After a Grace Period

If a policy owner forgets to make a payment altogether after the grace period ends, the policy may lapse and coverage could end. This is most often true for term policies with no cash value contained within the policy; for permanent policies with a cash value element, the insurance company may automatically make premium payments from funds contained within the policy’s cash value, thereby extending the life of the policy. However, if no cash value is available, the policy could still lapse. Refer to your policy for details.

After a policy has lapsed, you may be able to reinstate your insurance according to the reinstatement provision in your policy. Reinstatement will require that the missed payment amount be remitted to the insurer. Some companies will require a reinstatement application and a medical examination to determine if the insured’s health has significantly changed during the coverage lapse. This may affect future premium payment amounts and even insurability. It is possible to lose coverage altogether during the reinstatement process. The reinstatement provision within your policy will provide details regarding the requirements for reinstatement, including how many years a reinstatement after a lapse is permitted, typically three to five years.

Note that life insurance companies will not honor a death benefit if the insured passes away during a coverage lapse. This means that a policy’s beneficiaries would not receive payments from the policy’s death benefit. However, it may be different if the insured passes away during a grace period after a payment has been missed. Again, it’s important to understand the terms of your specific policy.

Passing Away During a Grace Period

If the insured passes away during a grace period, insurers will honor the death benefit but subtract the missed premium amount from the total amount that becomes available to beneficiaries. For example, on a term policy of $100,000, in which a payment was missed and the insured passed away during the grace period, the death benefit would be $100,000 minus the premium payment amount that was missed. If the premium payment was $100, the death benefit would become $99,900.

Special Circumstance Grace Periods

Some insurers will offer special grace periods to those affected by natural disasters or national emergencies. While these circumstances are rare, if they are offered, it’s important to read any guidance that accompanies an announcement of this type. If you’re unsure about what you are required to do to take advantage of the special grace period, contact your insurance company for clarification.

Make Your Payments On-Time

The best way to avoid the hassle of life insurance reinstatement is to pay your premiums on time.

Some life insurance companies offer payment options that are easier to manage. An annual payment only needs to be made once a year and something as simple as a calendar reminder can help with meeting the due date. If an annual payment is not possible with your current financial situation, and you must pay monthly, allocate funds to your policy early (if paying manually), or set up automatic payments with your insurer or use your financial institution’s bill pay feature. Automatic payment features can eliminate the need to use a grace period except in the gravest of circumstances when funds are not available.

While grace periods are a great safety net to have, it’s best not use them at all if you can help it.