The grace period is the time after a missed insurance premium is due, where a life insurance policy will not lapse even though the payment is past due. The grace period is a very useful feature, whose inclusion in every life insurance policy is mandated by every single state in the United States. The minimum grace period varies from 28-31 days depending on individual state laws, but some companies may give longer grace periods. To find the minimum length of a grace period in your state you can read about the rules and regulations for your state here.
The grace period officially begins the day the missed premium payment is due, and ends at the close of business after the prescribed number of days have passed. In a whole life, universal life, or variable universal life policy, the grace period would only be effective if there was no remaining cash value in the policy, and the premium payment was due. If a premium payment is missed while cash value remains, it is unlikely that a policy will go into “grace period status”.
Purpose Of Grace Period
Saving Death Benefit Payments To Beneficiaries
The grace period serves two extremely useful purposes for life insurance owners and beneficiaries. The first and arguably most important benefit of the grace period is that if a premium payment is slightly late, the grace period prevents a life insurance company from denying an otherwise valid death claim. This is very important to the beneficiaries of the policy, who may be relying on the proceeds of the death benefit to provide for them after an insured person passes away.
This is all the more important because it is easy for an insured/owner to miss a payment when he or she is near death. The owner may be in the hospital, either because they are sick or they are visiting the insured, and the family may overlook bills for a brief time. It is also easy to miss a bill during life changes such as moving and changing addresses, or spending time on vacation. If every time a bill was slightly late an insurance company denied a death claim, there would be a lot of beneficiaries who were counting on the money left in the lurch for what could be a very valid reason for being late.
Even if the beneficiaries were eventually able to recover their payment through the court systems, this is a long and costly process, and it would make people much less likely to buy life insurance in the first place. The grace period helps preemptively resolve disputes of this nature, facilitates fairness in the life insurance industry, and promotes a standardized healthy and ethical business environment.
Prevents Lapses That Could Create A Need For Underwriting
If a policy lapses, an insurance company is not obligated to reinstate the policy without underwriting. Most companies will provide a period of time after lapse that an owner can still submit a reinstatement payment and bring the policy back into good standing without the need for the insured to pass through the underwriting process again. After this period of time, underwriting may be required.
The real significance to this is that if an insured person has a material change in health, the insurance company can deny reinstatement. If a policy did not have a grace period, insurance companies would be able to pick and choose the most favorable clients each time a payment was slightly late, and this would be often. People who most need life insurance are those who have the highest risk of mortality. If a person has a heart attack, stroke, cancer, HIV, or other serious illness, it may be impossible to obtain life insurance.
The grace period helps prevent extreme culling of clients to suit an insurance companies desired risk profile. At best it also prevents the inconvenience of the policy lapsing each time a payment was late.
Grace Period Payments May Be Larger
Policy owners need to beware that a grace period payment may be larger than the premium payment that was due. The calculation for grace period payments can be complicated and vary between products and companies. Always check with your life insurance company before a policy goes into grace period to understand the repercussions.
There is a good reason that every state in the country has a law requiring a grace period, and the reason is that the grace period is necessary and useful for the smooth operation of the life insurance industry from policy owner’s, insured’s, beneficiary’s, and even insurance company’s perspective.