I’ve written on this topic before, but a recent incident made me think it is worth re-visiting. Failure to pay a premium on a timely basis will not result in the immediate termination of the policy due to a contractual provision in the policy known as the grace period. That is, a life insurance policy will remain in force for 31 days after the due date, even if the premium isn’t paid.
If death occurs during the grace period, the full claim (less the unpaid premium) will be paid. The purpose of the grace period is to prevent policy lapses due to an oversight. If the premium is paid during the grace period the policy continues in force uninterrupted.
The problems start if the premium isn’t paid by the due date or within the grace period. Whole life policies have built-in safeguards to prevent them from lapsing, so I’ll just address term insurance today.
If the premium isn’t paid before the grace period expires, the coverage terminates. That is, no claim will be paid if death occurs after the grace period expires. However, for the 31 days following the expiration of the grace period, most companies will re-instate the policy if the insured has had no major health issues since the policy was issued, and will attest to that on what’s known as the “short form.”
If the premium still hasn’t been paid 62 days after it was due, most companies will require full underwriting, including lab work, to re-instate the policy. For many, if not most people, that would pose no significant problem, other than some minor inconvenience. But for those few who have had an adverse turn of health, it can be catastrophic.
It was such a case to which I was recently referred. The insured was in year 14 of a 20 year term policy, and had neglected to pay the premium within the grace period. The short form only asked three questions, but one of them referred to heart issues. Since he had had a stent put in several years ago, the insurance company declined to re-instate the policy.
Now he must apply for new coverage which, because of his age and heart issue, will require nearly three times the premium of the old policy. There is also a chance that the exam could uncover issues that would render him uninsurable.
There are several ways to avoid this problem, but the easiest way is to have the premium paid by the electronic funds transfer (EFT) method, whereby you authorize the insurance company to electronically take the premium out of your bank account.
However you choose to address this issue, it is imperative that you don’t inadvertently let your policy go past the grace period. Not only will you have no coverage, but you may find it difficult, expensive, or impossible to get new coverage.