Grace periods: Are they fair?

The grace period is a welcome product feature for both the client and the insurance company but many policyholders are unaware of this clause in their contracts.

A life insurance contract is based on the principle that an insurer provides a benefit, which is payable on death, disability, illness or survival, in return for a premium.

Typically, when premiums are not paid for two consecutive months, the policy will lapse and the policyholder would not enjoy any further cover. However, the Long Term Insurance Act also makes provision for a grace period during which policyholders can catch up on unpaid premiums, while their cover remains in force.

Grace periods in practice

When premiums are not paid when due, the insurer has an obligation in terms of the Act to inform the policyholder of such failure to pay premiums. The Act also states that insurers must allow policyholders a period of grace of at least 15 days, during which arrear premiums can be rectified. In the life insurance industry, the norm is to allow policyholders a grace period of 30 days.

The grace period will be the same irrespective of the frequency of premium payment i.e. monthly or annually. For certain policies, most notably funeral policies that comply with the Zimele standard, a grace period of up to six months is allowed, depending on the period for which the policy has been in force.

Grace period vs. cool-off period

The grace period for unpaid premiums should not be confused with the cool-off period. The cool-off period is the period during which a policyholder can decide not to continue with a contract, after taking up the policy, without any charges. In contrast, the premium grace period is ongoing for every payment that is due.

Welcome safety net

The allowance of a grace period makes practical sense since there are valid reasons why premium payment does not always occur without problems. For example, the bank that authorises a debit order payment might experience technical difficulties or human error might cause premiums to be paid to the wrong account. It also often happens that a policyholder would change their bank accounts and forget to inform the life insurer of the change.

Apart from these scenarios, more commonly, the policyholder might experience financial difficulty at a given time. The grace period is a welcome safety net in all of these scenarios.

Are there advantages to the insurer?

Retention of policies has been a hot topic amongst all life insurers of late. If policyholders are fully aware of the provisions of the grace period clause in their contracts, this clause can in fact assist insurers and financial advisors to reduce the number of policies that lapse. Policyholders tend to accept that they are not covered as soon as a premium is not paid when it was due. Creating awareness amongst policyholders would make them think twice before just assuming that their cover is lost.

Making clients aware

Most policyholders will not know of this feature of their product until the reality of being unable to pay their premium sets in. Most prudent policyholders are serious about keeping their cover intact and when difficulties in paying premiums arise, they will start consulting policy documents to understand their options. However, not all policyholders are as diligent.

As a financial advisor, it is important to emphasise to your client the importance of reading and understanding all the clauses in their contract, and the grace period clause is no exception.