Insurance grace period 101

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To understand what an insurance grace period is, imagine owning a small restaurant. One aspect of your job means preparing for the unexpected. Grease fires, kitchen accidents, and slips will likely happen: the question is not if, it’s when.

As an intelligent and cautious restaurant owner, you know there’s no predicting when a small error by your staff will occur; that’s why you set your insurance policy to automatically renew every year on the same date (let’s say March 1st). Unfortunately, this year the business credit card linked to the account expired in February. Though you have your new card, you forgot to update your insurance agency.

If disaster strikes in the kitchen after March 1st, and you haven’t yet realized that your insurance wasn’t automatically renewed, your business could be exposed.

That is, unless your policy comes with a grace period. A grace period is a certain amount of time after the policy has expired in which you are still covered as the policyholder.

Insurance grace period explained

An insurance grace period is a set amount of time in which a policyholder’s premium is past due, but they haven’t lost coverage yet. The policyholder has a “period of grace” in which they can still pay their premium with zero lapse in coverage. So, in the case above, if it’s March 4th and there’s property damage (something normally covered by their small business insurance), the restaurant owner could still be covered, as long as they pay their premium before the end of the grace period. This is also assuming the grace period lasts for 4 days (which not all of them do). However, this is a simplified and straightforward case.

What makes this term tricky, is that most grace periods are reserved for binders. Not only that, but grace periods have different rules and regulations depending on where you live.

To further break down the insurance grace period, let’s jump into:

  • Insurance binders and what these are
  • The typical length of a grace period (if one exists for the policyholder)
  • State-by-state regulations around grace periods
  • What happens when you miss an insurance premium payment

What is an insurance binder?

Insurance binders are temporary insurance solutions, issued by certain insurers, in one of two situations:

  1. When a more permanent insurance policy is being formalized
  2. When an insurer is going to reject a policy

While binders are just “interim policies,” they are still considered enforceable and fully legal insurance contracts. Which means they will define:

  • The identity of both parties
  • The exact nature of what’s insured
  • The risk involved
  • How long the temporary coverage lasts
  • The amount of coverage
  • Cost of the premium

Binders are common when purchasing a home or car, when a temporary insurance policy is needed for the dealership or property lender to proceed. This interim policy provides coverage while a more permanent policy is being created.

Length of an insurance grace period

Most insurers want to keep the grace period as short as possible. This is because it’s a period of time in which the risk for the insurance company increases. They don’t know whether or not the policyholder is going to renew or pay their insurance premium; in essence, they are left in the dark. Yet, they still need to be ready to cover the policyholder should a problem arise during this limbo period.

As such, grace periods vary in length.

  • Some are as short as 24 hours
  • Others are as long as 30 days 
  • In unique situations, grace periods may extend as high as 90 days (such as marketplace health insurance plans under the Affordable Care Act)1

Additionally, most policies do not offer grace periods. This is especially common in states that don’t require insurance companies to have a grace period for their Insureds or policyholders.

State-by-state regulations for insurance grace periods

Your state insurance commissioner determines whether or not insurance companies must:

  1. Offer a grace period at all
  2. Inform their insureds when they’ve missed a payment

So, if you live in a state where the insurance provider neither has to offer a grace period, nor do they have to inform you that you’ve missed a payment, you can suddenly be without coverage the minute your payment is past due. This is something you want to be sure never happens.

Both the individual state and the type of insurance will play a role in whether or not there is a required grace period before late payment and associated fees are owed.

To see some examples of this:

Texas health insurance comes with a 31-day grace period following a missed premium payment.2

Florida auto insurance policies must come with a grace period that reflects the premium payments:3

  • If you have a weekly premium, the grace period is 7 days.
  • If you have a monthly premium, the grace period is 10 days. All other policies have a grace period of 31 days.

California life insurance policies come with a 60-day grace period following a missed premium payment.4

Be sure to reach out to your state insurance commissioner if you want to find out your state’s policy on grace periods.

What happens when you miss a premium payment?

There are two pieces to this question. Depending on your state’s regulations and your insurance company’s policy, one of two outcomes commonly happen when you miss a premium payment.

  1. If you miss a premium payment, and you are covered under a grace period, you will (typically) have to pay a late fee to resume normal coverage.
  2. If you miss a premium payment and you are not covered under a grace period, you may end up having to restart the entire application process over again in order to reinstate proof of insurance.

Before you sign up for an insurance policy, be sure to ask the representative about grace periods and what happens if you miss a payment.

Does Thimble offer grace periods?

Because Thimble does not offer annual policies, there is no need for a grace period. All Thimble premiums are due up front, whether it be for monthly or on-demand coverage.

With Thimble, you decide the coverage when you need it. It’s on when you’re working, off when you’re not. That way, you’ll never be exposed during a time you needed coverage. That’s Thimble—covering your blindspots.

That’s not the only way Thimble is shaking up the slow-moving insurance industry. With any of our general liability insurance or professional liability insurance policies, you can generate Certificates of Insurance (COIs) in an instant with the Thimble app and add as many Additional Insureds as you’d like—all quick, easy, and completely free.

Plus, with Thimble, you can cancel your policy up to an hour before your coverage is set to begin penalty-free. It’s these game-changing offerings that make Thimble the next big thing for small business insurance.

Sources:

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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