For a life insurance policy to stay inforce (active), you need to make regular premium payments. But what if yours is late or you miss it altogether? Fortunately, every life insurance policy has a safety net known as the grace period provision.
The life insurance grace period is typically around 30 days. Let’s explore how grace periods work and what happens when you don’t pay your premium on time.
- What Is the Life Insurance Grace Period?
- What If You Miss the Grace Period?
- What Happens if Your Policy Lapses?
- What If Your Premiums Are Unaffordable?
- How to Avoid Policy Lapse
Explore our life insurance blog to learn more about life insurance products, how to buy, what it’s like to own a policy, and other useful advice.
What Is the Life Insurance Grace Period?
Every life insurance policy has a grace period that usually lasts 30 days from the payment due date. Your coverage will continue as long as you make the payment and the insurance company processes it within that time frame.
In addition, even if you haven’t paid your due premium, you’re still insured during the grace period.
Your term life insurance policy’s monthly premium was due April 30th, but you changed banks and forgot to update your insurance company with the new account information.
You die in an accident on May 5th without ever sending in the due payment. Because your death occurred within the grace period, the insurance company still pays your beneficiaries the death benefit proceeds after deducting the owed premium amount.
What If You Miss the Grace Period?
If the grace period passes and you still haven’t paid your premium, coverage will lapse in most cases.
If your policy lapses, it’s no longer active. Losing coverage means two things:
- Should you pass away, your beneficiaries wouldn’t receive a death benefit.
- The insurer will not refund the premiums you paid in the past.
However, there are some cases in which your policy would not lapse if you miss a payment, depending on your insurance type and how it’s set up.
Missing Payments on Term vs Permanent Policies
Life insurance policies fall into one of two broad categories: term and permanent. How do missed payments work for each?
- Term life insurance policies don’t accrue cash value and will lapse if the premium is overdue and the grace period expires.
- Permanent life insurance accrues cash value over time. Many permanent policies have an automatic loan provision or something similar. With this provision, if a payment is missed, these policies automatically draw from the cash value to cover the premium, preventing the policy from lapsing.
What Happens If Your Policy Lapses?
Your policy will lapse if you don’t pay your premium by the due date, and your grace period expires. But, you may have the option to reinstate your policy.
Each company has guidelines for reinstatement, but most will allow you to apply up to five years from the end of the policy’s grace period.
You’ll need to fulfill the company’s specific requirements to reinstate the policy. These requirements may include:
- Reinstatement application: All companies require you to complete a reinstatement application similar to the initial application you filled out for the policy.
- Health statement: Most companies will want to assess if your health condition has changed since your initial application. However, if you apply for reinstatement within 30 days after the end of the grace period, many companies may waive this requirement and not require underwriting to reinstate the policy.
- New medical exam: If your health statement indicates significant changes, you might be asked to undergo a new medical exam.
- Pay outstanding premiums: Finally, if you’re approved for reinstatement, you’ll be required to pay all overdue premiums from the end of the grace period. If your policy lapsed several years ago, this could be significant.
In some cases, if several years have passed since the policy lapsed, applying for a new policy altogether may be a better choice than reinstatement.
|Note: Specific terms and requirements vary significantly between insurance companies and policy types. Not all insurers may offer the same grace period duration, reinstatement window, or requirements for health statements and medical exams.|
Reinstatement vs Replacement
Reinstating a policy and replacing a policy are two different options for policy owners.
- Policy reinstatement: reactivating a lapsed policy
- Policy replacement: canceling an existing policy to start a new one
We’ve already explored the process of policy reinstatement.
Policy owners might choose replacement for several reasons, including:
- Obtaining a better rate
- Changing coverage amounts
- Switching to a different type of policy
We always recommend waiting until your new policy is 100% in effect before canceling an existing policy to avoid gaps in coverage.
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What If Your Premiums Are No Longer Affordable?
If you’re struggling to make your payments, there are a few options to consider:
- Lower your coverage: Some policies allow you to reduce the face amount. Call your agent or insurance company about possibly reducing your death benefit, which could lower your premium.
- Switch to a less expensive policy: If you have a permanent life insurance policy, you might consider switching to a term policy, which can be less expensive. Bear in mind that term policies do not build cash value and only provide coverage for a specified period.
- Use the policy’s cash value: If you have a permanent policy that has built up cash value, you can use some cash to cover your premiums temporarily. Be cautious with this option, as it could reduce your death benefit.
- Policy surrender: In extreme situations, you could consider surrendering your policy, meaning you cancel the policy and possibly receive the cash value. Be aware that this decision may have tax implications.
- Life settlement: Sometimes, you can sell your life insurance policy to a third party for a lump sum. The third party would then take over the premium payments and receive the death benefit when you pass away.
- Non-forfeiture options: Your policy may have non-forfeiture options that provide reduced paid-up insurance, extended term insurance, or cash surrender in instances of non-payment.
When shopping for life insurance, buy a policy you can afford long-term. Not all life insurance policies are adjustable, and you may be forced to forfeit your coverage if you can no longer afford it.
How to Avoid Policy Lapse
Life insurance is not for your benefit but for the financial security of your loved ones.
To ensure you don’t accidentally miss a payment and risk your policy lapsing, here are some tips:
- Set up reminders for yourself to pay on time. These can be calendar alerts on your phone or handwritten notes on your home calendar.
- Set up automatic payments. All major life insurance companies can automatically draft your premium payments from your checking account. Remember to update the details if you switch banks.
- Designate a third party to receive payment alerts. You can choose a trusted person to receive late-payment notifications by completing a form from your insurance company. If you miss a payment, you and your designee will receive a late notice.
Learn what you need to know about a policyowner’s responsibilities beyond regular premium payments.
Contact a Quotacy Agent for Unbiased Life Insurance Advice
Grace periods are built-in safety nets to help preserve your coverage. But if you find yourself with a lapsed policy and need a new one, Quotacy can help.
Our quoting tool doesn’t require any contact information. You can get term life insurance quotes instantly.
As life changes, so do our life insurance needs. Contact us directly for a needs analysis, or use our free life insurance calculator.