The brief window between when your premium is a day overdue and when your insurer cancels your policy is called a grace period. Insurance companies may give you anywhere from one to 30 days past the due date to pay your premium to maintain coverage. Without coverage, you would be responsible for paying for losses out of your own pocket. Plus, cancellations can make it difficult to get coverage from other insurance companies.
How long is a grace period in insurance?
That depends on several factors, including the type of insurance policy, your insurance company, where you live, and how you pay for your policy.
Some states require insurance carriers to have a grace period to make it easier for consumers to maintain coverage. Insurers may increase the length of any required grace period by a certain number of days if it better suits their system, but they can't reduce a grace period that's required by law.
How you pay might also impact a grace period. For example, a policy paid through an escrow account may have a 50-day grace period after the effective date, but if the policyholder pays out of pocket, the grace period may be only 16 days after a missed payment.
State governments have also mandated grace periods during unique circumstances. California, for example, enacted a 60-day grace period during the COVID-19 pandemic to give policyholders more time to make payments given the uncertain financial times.
How does a grace period work?
The way a grace period works is very simple. Your policy payment has a due date. After the due date, the grace period kicks in. So let’s say you have a 16-day grace period on your homeowners insurance. You need to pay your premium sometime before the end of that 15-day window or your insurance company will cancel your coverage.
Imagine what might happen if your policy doesn’t have a grace period and you forget to send in your premium. You’re likely to be without coverage immediately. Any peril that would have been covered by your insurance policy is now your responsibility. Essentially, a grace period means you have a little wiggle room. You’re still insured by the policy so your insurance company can cover claims as long as you pay what you owe before the end of the grace period.
Are there penalties with grace periods?
Even though paying your premium in the grace period keeps your coverage intact, it’s technically a late payment. As a result, your insurance company may charge a late fee. Penalties are often flat fees, such as an additional $30 when you make a payment during the grace period. Not every insurer penalizes you, and some offer grace periods with no late fee at first, but a penalty later on.
Why grace periods in insurance are important
Insurance companies often see coverage gaps as red flags, especially when they’re your fault. Losing your insurance because you missed a payment is a big red flag that can make it difficult to find coverage and cause your rates to increase. Additionally, failure to pay your premium by the end of the grace period will result in canceled coverage.
The reasons for not paying insurance premiums are often errors outside of the policyholder’s control. Without grace periods, simple mistakes like payment getting lost in the mail or a bank error could cause many insurance policies to lapse. The idea of the grace period is to give policyholders enough time to rectify the payment problem and maintain coverage.
