If you’ve been browsing life insurance policies, or have recently had to look into the details of your existing insurance policy, you’ve likely come across the term life insurance grace period, and wondered what it means.
What is a Life Insurance Grace Period?
A life insurance grace period refers to the period of time after premium payments are due, during which the policy is still active. It is also commonly referred to as a “lapsation grace period” as it is technically delaying an insurance policy lapse by the length of the grace period – typically 30 days from the premium due date. Grace periods are legally required, and insurance companies are obligated to pay the policyholder the full death benefit of the policy during this time frame.
Why is a Grace Period Necessary?
In theory, you should always be paying your insurance premiums on time. Life insurance policies are long term investments, and you should aim to always have the financial consistency to never have a policy lapse, especially due to non-payment. If you feel stressed by due dates, many life insurance companies offer automatic payments which withdraw your premium amount from your checking account every month or year – and these are highly recommended.
What if I Make a Late Payment?
However in many cases, the policy holder paying the insurance premiums is also the insured, meaning if they get very ill, they may be unable to make payments, and their families are likely concerned with more immediate health matters. It is for this reason grace periods are legally protected, so that life insurance policies doesn’t expire when they are needed most.
Should you for some other reason find yourself in a situation of being late on premiums, it’s vital to know your grace period length, and do your best to pay off your premium balance during this period of time. Again the standard amount of time for a grace period is 28-30 days, depending on your state laws, but it’s best to always check the details with your life insurance company. If you do not make a late payment during the grace period, you will suffer a lapse in your life policy and a loss of insurance coverage.
Making late payments will usually present an additional cost – typically one month’s premium – however it is financially almost always worth it to do so. Buying a new insurance policy is basically guaranteed to be more expensive as the insured will be older, and will have to answer a new set of healthy questions to determine if there are any new medical conditions.
What if I Fail to Pay During the Grace Period?
If you have a failure of payment during your grace period, your policy is officially considered lapsed and your life insurance company is under no obligation to pay your death benefit. In other words, your policy has ended and you no longer have life insurance coverage. However please note: the death benefit is separate and different from the cash value of your policy (we’ll cover this more later).
Fortunately, many life insurance companies offer policyholders the ability to reinstate a lapsed policy during a given time frame – usually with both a late payment fee and higher premiums.
Reinstating a lapsed policy can typically be done without underwriting in the first 30 days of a policy lapse (this is 2 months since your last premium payment). However, after that 30 day period, reinstating a policy requires a limited underwriting process to ensure there are no significant changes in the health status of the insured. This underwriting is legally binding, might require a new medical exam and lying on it will lead to a void contract should it be discovered. Fortunately, the underwriting is much easier than the initial insurance application and should not be too time consuming.
Term vs Permanent Life Grace Periods
Grace periods and policy lapses are most often used in reference to term life insurance, not permanent life insurance. This is a function of the cash value of a permanent life policy.
In a term life policy, you pay monthly insurance premiums in exchange for a specified coverage amount (similar to car insurance). Should you fail to pay, the life insurance company is on the hook and cannot afford to insure your policy. This is where a policy lapse happens.
In permanent life insurance, such as whole life insurance, you are always paying into a cash value savings for the policy. Thus if you fail to pay premiums, there is still a backup cash reserve for the life insurance company to access, allowing them to keep your policy active without losing money. Therefore it’s fairly unlikely to have a enter a grace period status on a universal life or a whole life insurance policy (unless you’ve exhausted the cash value of the policy).
The Life Settlement Option
My life insurance is about to enter a grace period and I can’t afford to pay premiums, what do I do?
If you cannot afford to keep paying your life insurance premiums, you should first and foremost always consider: do I still need this policy? If you feel strongly you have loved ones you wish to provide financial protection with, you should always discuss your options to keep paying with your insurance agent and financial advisor.
If your children are now adults, you’re divorced, or for whatever reason no longer feel the need to have life insurance coverage, you should consider the option of selling your life policy for cash, through what’s known as a life settlement.
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In a life settlement, a third party investor assumes payments of your premiums, in exchange for being named the beneficiary of your policy. You will receive a percentage of the policy’s face value – typically 20-30 percent – in cash, and the third party investor will receive your death benefit should pass in the given term. The rules and amounts will differ based on if you have a term policy, universal or whole life. Regardless of which type of insurance you have, if a policy enters a grace period and you cannot afford to make payments, it’s always better to receive something for your policy instead of nothing.
At the the end of the day, life insurance policies are designed to do one thing: insure your loved ones in the case of your untimely death. When getting a life insurance quote, you should always evaluate if you will be able to make ithe insurance premiums for the entirety of the policy. A grace period is a safety valve, and you shouldn’t aim to hit it.
Should you have unforeseen circumstances change your finances, know you usually have a month grace period to keep your policy active, another month to reinstate it with a fee, and the option of a life settlement if non-payment is guaranteed. Whatever you choose, it’s always wise to consult with your life insurance agent, your family, and a financial advisor to make sure you are exploring the option best for you.