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 in the policy, it is unlikely that a policy will go into “grace period status” as long as it can be used to pay the premium or at least draw a loan to pay the premium. In this article we cover:
The Purpose of a Grace Period
How to Find Out if a Policy is in Grace Period
What to do if a Policy Enters the Grace Period

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.  If a death occurs during the grace period, a life insurance company must honor the claim and pay the death benefit out to the beneficiary.

This is all the more important because it is easy for an insured person or 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

Grace Period

The second purpose that the grace period serves is to help prevent lapses.  If no payment is made during the grace period, the policy will definitely lapse.   This creates a more difficult situation for the owner of the policy, and the life insurance company.

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 entire underwriting process again.  They will typically ask the insured person to attest to the fact that no significant changes in health occurred since the policy was issued.  If the policy has been in a lapsed status for a while, underwriting may be required in order to reinstate the policy.  The grace period can give everyone time to figure out the payment and keep the policy from lapsing.

The real important significance to this is that if an insured person has a material change in health, the insurance company can deny reinstatement.  A person may also no longer be able to obtain insurance coverage if they are not healthy.  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.  So many common health disorders cause people to lose their insurability.  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 an extreme culling of clients to suit insurance desires to minimize their risk.  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.

How to Find Out if a Policy is in the Grace Period

It is very easy to find out if a policy is in its grace period.  The insurance company is obligated by law to be forthright about it, and agents are incentivized to keep their clients insured for as long as possible.  You can find out in four easy ways if your policy is in the grace period:

  • A written notice goes out when the policy enters the grace period.  It is mailed to the owner’s address on file.
  • Some companies are willing to send secure electronic correspondence.  You will get a notification by email that you have a message.  You will need to log into the secure message center and retrieve your message notifying you that the policy has entered the grace period.
  • You can contact the agent of record on your policy (also called the servicing agent), or you can contact a local agent’s office.  They will be happy to work with you.
  • Contact the home office directly! Insurance companies have toll free numbers and call centers waiting to answer your policy questions.  You can get any information about your policy directly from the home office.

What to do if a Policy Enters the Grace Period

If you would like to keep the coverage, make a payment of the regular amount, plus any extra that may be due.  Insurance companies do not charge late fees, but to bring a policy out of grace period you may still need to pay more than a regular premium payment.

You should contact the office, and find out the best way to send the money.  If you are planning on sending a payment by parcel delivery service, or by overnight delivery, insurance companies often have special mailing addresses where someone is available to sign for packages.  You may also be able to drop a check off with a local agent or send a wire or an ACH payment.  Specific wire instructions must be followed closely to make sure that your account is credited correctly.  A life insurance company will credit your policy on the day payment is received.  Be warned though, that if a check bounces the grace period does not restart.  You will be responsible for replacing the payment before the expiration of the grace period if you wish to prevent the policy from lapsing.

If you no longer wish to continue with the policy, you can allow the policy to lapse.  Life insurance companies do not report people who miss payments to credit reporting agencies and clients do not need to worry about negative consequences from a policy lapsing, besides the policy no longer providing coverage.  Only let a policy lapse if you are absolutely sure that you no longer wish to continue with the policy.  If you are planning on replacing the policy with separate coverage, you should always obtain the other coverage before you cancel an existing policy.

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