What is an Insurance Grace Period?
An insurance grace period is a defined amount of time after the premium is due in which a policyholder can make a premium payment without coverage lapsing.The insurance grace period can vary depending on the insurer and policy type.
Depending on the insurance policy, the grace period can be as little as 24 hours or as long as 30 days. The amount of time granted in aninsurance grace period is indicated in the insurance policy contract. Paying after the due date may attract a financial penalty from the insurance company.
How an Insurance Grace Period Works
Insurance grace periods protect policyholders from immediately losing coverage incasethey are late with a premium payment. Regulations covering insurance grace periods, including how long they must last across policy types, are managed by states.
Some states may allow insurers to drop policyholders immediately,without advanced notice if premiums are not paid on time.
Insurance companies want the insurance grace period to be as short as possible in order to prevent a situationin which they haven'treceived a premium payment but still have to cover damages. As long as the insurance grace period is in effect, the insurer will be responsible for paying providers for any services they render to the policyholder.
If an insurance policy is canceled due to non-payment, there are no loopholes to forcea canceled policy to payout andyou'll likelyhave to go throughthe entire application process again.
Key Takeaways
- Insurance grace periods are intended to shelter policyholders from losing all coverage if they are late with a payment.
- Many financial institutions offer grace periods on their loan products, from student loans to credit cards.
- Insurance grace periods are usually not lengthy affairs, as insurance companies don't want to risk having to pay out for damages without having received payment.
- After an insurance grace period, a policy may be canceled due to non-payment, which will be detrimental to the policyholder.
If you choose to reinstate coverage,insurers usually need to makesure there were no losses in the interimby inspecting the property. The insurer may also require a larger down payment on thepremium or require that it be paid in full.A non-payment history can complicateshopping for new insurance. Insurance applications often ask if you've ever had a policy canceled, and if you answer yes, you'll beprobably beflaggedas a high-risk customer andbe subject to higher premiums.
Example of an Insurance Grace Period
Consider a homeowner that has a flood insurance policy on theirhome in a flood-prone area. The policy premium due date is set to April 1, and the homeowner must pay the premium in order to have coverage for an additional year. The homeowner writes a check on March 28but forgets to put it in the mail, only realizing the mistake on April 3. On April 4,a flood causes significant damage to the basem*nt.
If the policy did not have an insurance grace period, the insurer would consider the coverage lapsed on April 2 andnot cover any of the flood damage. If the policy does havea grace period that extended to April 3,the policy would cover the flood damage.
