What Is A Life Insurance Grace Period: What Happens When Your Policy Lapses?
70% of Americans believe they should have life insurance. However, 51% don’t have a life insurance policy because they believe they can’t make their premium payments on time.
Fortunately, most life insurance companies will offer a grace period. During this time, your coverage will continue so long as you make your life insurance premium payments within the given period. In this guide, you'll find out how a grace period works and how a policy lapse can affect your coverage.
Life Insurance Grace Period Definition
A life insurance grace period is the amount of time after your premium payment is due, where you can catch up with missed payments without any consequences. If you still fail to pay after this period, you risk losing your insurance policy.
Depending on your life insurance policy, the grace period can last anywhere between 1 and 30 days, although there are some exceptions. During this period, you can still make your premium payment without any consequences.
How A Life Insurance Grace Period Works
A grace period ensures that a person doesn't lose coverage in case they miss a premium payment. How long a grace period lasts will depend on the life insurance company you work with, state laws, and your payment frequency.
In most cases, a policyholder who pays their premiums annually, half-yearly, or quarterly will have a grace period of 30 days. For people who pay premiums monthly, the grace period might be reduced.
What Happens When You Miss A Grace Period?
If you fail to make a life insurance payment within the grace period, you risk a policy lapse. This means you will no longer have insurance coverage for your beneficiaries. Before your policy lapses, your insurer should send you a lapse notice with a due date.
In some cases, insurance companies may tap into the policyholder’s cash-value to pay overdue fees and keep the policy from lapsing. You must have built up enough in your cash-value account first, however.
Unfortunately, if an insurer cancels your policy due to non-payment, your family won't receive the death benefit.
You’ll also have to undergo the underwriting process again if you want a new policy. A life insurance agent might ask about your cancellation history and flag you as a high-risk person. If so, you'll have to pay higher life insurance rates.
Death During The Grace Period
If you die during a grace period, your family can still receive the payout money under two conditions. First, you must have reinstated your lapsed policy before your death. If not, insurers might withhold the payout on your life insurance contract.
Your loved ones might also still receive the payout money after the insurer deducts the unpaid amount. Alternatively, your beneficiary can also cover the balance to receive the death benefits.
Reinstating vs Re-Purchasing
If your policy expires during the grace period, there are a couple of options available to you.
You can apply to reinstate your insurance if it expires. This usually requires you to make your overdue payment plus any interest. However, some companies will require that you undergo an additional medical exam, provide new health information, and pay a costly penalty.
While you can reinstate your policy within three to five years, it's best to do so as soon as possible. By re-applying quickly, you may not have to retake a medical exam or provide new information.
If you think other life insurance policies suit you better, you might consider buying a new one altogether. For example, you might buy a new life insurance policy if you want to invest in a cash value component that your previous contract didn't have.
How To Make Premium Payments On Time
The best way to make the most of your policy is to make sure you pay your life insurance premium on time. Here are some tips:
Set a reminder on your mobile phone for every upcoming insurance payment. Stay on top of any upcoming due dates.
Set up an automatic payment plan through your bank account or credit card. Ensure that you always have sufficient funds.
Allow a trusted individual such as a family member, partner, or friend to receive late-payment notifications.
Let your insurance company know if you've updated your bank information or recently changed addresses. This allows you to get lapse notices.
Consider making quarterly, bi-yearly, or annual payments instead of monthly. If you can’t keep up with frequent due dates, fewer deadlines can ease the burden.
Ask a trusted person to help make payments on your policy if you can't currently afford it.
Buy a single-premium policy that requires only one payment to provide coverage. Keep in mind that this can range from $5,000 to $10,000, which is significantly more expensive than traditional insurance policies.
When shopping for life insurance products, make sure you buy only what you can afford. If you miss a life insurance payment and your policy expires, reinstate it as quickly as possible to avoid losing your death benefit.
If you have more questions about life insurance, contact us at Wesley LLC. Learn all about which insurance products best suit your needs with our expansive library of financial resources.