What is the Grace Period in Life Insurance? What happens when you do not pay your premiums or payments on time?
What will happen if a Policyholder dies within the Grace Period? Will the Nominee get the claim or will the claim be rejected?
Definition of Grace Period in Life Insurance
Grace Period is the extra time you get to pay your premiums after the due date is over.
Grace Period regulations
There are no written regulations about the grace period. Insurance companies give grace period as a part of good servicing to the customers.
You also get reminders from Insurance company if your premium is due (normally in case of Quarterly, Half-Yearly and Yearly modes). For Monthly policies, most of the companies now accept ECS only.
Example of Grace Period in Life Insurance
If your premium due date is 8th December, 2014 (yearly mode) and you have not paid your premium on time, you still have 30 days/1 month to pay your premium before your policy lapses. Now what is a Policy Lapse? A Policy Lapse would mean that your Beneficiary/Nominee will not get any benefits if something happens to you.
Suppose, death of the Policyholder happens on 25th December, 2014, Beneficiary/Nominee will get the sum assured after deducting the unpaid premium for the year. If death of Policyholder happens after 30 days/1 month, Beneficiary/Nominee will not get any benefits. The claim will be rejected.
● Grace Period of Premiums – Timeframe and Mode
● Grace Period is different for different Modes of Time
• For Monthly payments – 15 Days
• For Quarterly payments – 30 Days/1 Month
• For Half-Yearly payments – 30 Days/1 Month
• For Yearly payments – 30 Days/1 Month
Time frame for grace period is also different for different companies. Some companies say, its 30 days and some other quote it as one month. It depends on company to company on how they calculate the 1 month period since February has 28 days and some months have 31 days too.
According to LIC
A grace period of 30 days will be allowed for payment of Yearly or Half-Yearly or Quarterly premiums and 15 days for Monthly (through ECS) premiums.
Grace Period of Payments – Term Insurance Policies
Not all companies give you a grace period of 30 days in Term Insurance policies even for a yearly mode. Some companies do provide for a grace period of 15 days in Term Insurance policy.
How unpaid premiums are deducted at the time of Claim Settlement?
All the unpaid premiums for the year will be deducted while settling the claim. Suppose, there are four people who have bought Term Insurance cover of Rs. 1 Crore with different payment modes. All the policies were issued on 8th December, 2013.
- “A” does not pay the premium and dies on 25th December, 2014;
Claim settlement amount would be Rs. 1 Crore – Rs. 10,000
- “B” pays the premium on 8th December, 2014 but forgot to pay his next premium which is due on 8th June, 2015 and he dies on 15th June, 2015;
Claim settlement amount would be Rs. 1 Crore – Rs. 5,000
- “C” pays the premium on time on 8th December, 2014 and dies on 25th December, 2014;
Claim settlement amount would be Rs. 1 Crore – Rs. 3,500 x 3 (the 3 Quarterly due in the policy year will be deducted)
- “D” pays the premium on 8th December, 2014 but forgot to pay his next premium which is due on 8th January, 2015 and he dies on 15th January, 2015;
Claim settlement amount would be Rs. 1 Crore – Rs. 11,000
ULIPs Grace Period
Normally, the rule is the same for ULIPs as in the case of traditional policies, but in some ULIPs, you have an option of auto cover.
Auto cover is when you stop paying the premium and still your policy is not lapsed. The company automatically deducts the amount from the fund value to cover the mortality charges. But this is not true for all ULIP investments. It depends on company to company and product to product.
Some insurance companies require a written consent from the customer to deduct the mortality charges from the fund value. Also, there is a limit of paying minimum premiums like for 1 year, 2 years, 3 years or 5 years.
So, do not wait for the reminders to pay your premiums. Pay on time, it will help you to become a disciplined investor. Please feel free to ask if you have any other question about grace period in life insurance.