Insurance Grace Period
What is 'Insurance Grace Period'
A period of time after the premium due date in which a policyholder is able to make a premium payment without the insurance policy 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 as an insurance grace period is indicated in the insurance policy contract. Paying after the due date may attract a financial penalty from the insurance company.
BREAKING DOWN 'Insurance Grace Period'
Insurance grace periods protect policyholders from immediately losing coverage in the case that they are late on paying their premiums. Regulations covering insurance grace periods, including how long they have to last across policy types, are managed by states. Some states may allow insurers to drop policyholders immediately and 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 situation from arising in which do not received 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.
For example, a homeowner has a flood insurance policy on his home in a flood-prone area. The policy premium due date is set to April 1st, and the homeowner must pay the premium in order to have coverage for an additional year. The homeowner writes a check on March 28th but forgets to put it in the mail, only realizing the mistake on April 3rd. On April 4th a flood causes significant damage to the basement. If the policy did not have an insurance grace period the insurer would consider the coverage lapsed on April 2nd, and would not cover any of the damage resulting from the flood. If the policy does have a grace period that extended to April 3rd then the policy would cover the flood damage.