In a circular issued last week, IRDAI has extended the grace period to renew life insurance policies by another 30 days. This grace period is offered to policies whose due dates fall between November 8 and December 31. This is a one-time relaxation which is meant to mitigate the hardship due to demonetization.
Typically, IRDAI extends grace period during unexpected events like natural calamities and war.
Let us understand the concept of grace period and how it helps policyholders.
What is insurance grace period?
Grace period is an additional time period given to policyholders to pay premium after the due date. This is applicable for life insurance policies as non-life policies generally have one year contract.
Most life insurance companies provide a grace period of 30 days to renew policies after the due date.
Which policies provide grace period to policyholders?
Traditional policies: Life insurance companies provide a grace period in traditional life insurance policies like whole life insurance, endowment plans and money back. However, such a period depends on the frequency of premium payment. For instance, insurance policies with yearly and half-yearly premium payment options provide a grace period of 30 days whereas policies with monthly premium payment offer a grace period of 15 days. Life insurers also extend a grace period of 15 days in term insurance policies and health insurance policies.
Similarly, life insurers also provide a grace period on renewal of ULIPs but it is slightly different due to their structure.
Since ULIPs are market linked products and have a lock-in period of five years, these policies don’t lapse till the completion of lock-in period. Typically, insurers provide a grace period of 15 days to pay premium after the due date. So, if a policyholder decides not to continue with her ULIP, life insurers move the accumulated money to the ‘discontinuance fund’ after the due date.
How does grace period help in insurance?
- It gives the policyholder a fair chance to renew an insurance policy in an unexpected event if she is not able to pay premium due to natural calamities, war etc.
- Grace period helps people who cannot pay premium on time due to ill health or relocation.
What happens to the claim settlement if policyholder dies during grace period?
Only in traditional life insurance policies, the nominee gets the sum assured after deduction of unpaid premium. In ULIPs, nominee gets the market value based on the valuation of the underlying assets or sum assured whichever is high.
Policyholders don’t get medical coverage during the grace period in health insurance policies.
Is there any penalty for paying premium during grace period?
There is no penalty on paying premium during the grace period.
What happens if a policyholder does not pay the premium even after the grace period?
- Life insurance policies: Policy will lapse due to non-payment of premium. But one can revive it with fresh terms and conditions. Typically, insurers insist to pay premium with penalty in the form of interest. This rate of interest depends on the date of commencement of the policy.
- Health insurance and term insurance policies get lapsed.