Premium payment modes and grace period

Two provisions that keep a policy alive

A life insurance policy stays in force only as long as its premiums are paid, and two parts of the contract govern how they are paid and what happens when one is late. The premium mode is the frequency the policyowner chooses for paying. The grace period is the window after a due date during which a late premium can still be paid without the policy lapsing. Exam items on this objective test the mode arithmetic, the length of the grace period, and exactly what the insurer may and may not do while a premium is overdue.

Premium payment modes

The policyowner selects a mode at application and may change it later on the policy anniversary or as the insurer allows. The standard modes are:

• Annual -- one payment per year.
• Semiannual -- two payments per year.
• Quarterly -- four payments per year.
• Monthly -- twelve payments per year, most often collected by pre-authorized check or

electronic funds transfer.

The rule the exam returns to is that the more frequent the mode, the higher the total cost for the year. An insurer that collects monthly loses the investment income it would have earned on a premium paid in January, carries the risk that the owner stops paying mid-year, and spends more on billing and collection. It recovers those costs through a modal loading: a percentage added to each installment. A policy with a 1,200 dollar annual premium might be billed at about 620 dollars semiannually or 105 dollars monthly -- 1,240 or 1,260 dollars over the year instead of 1,200. The annual mode is therefore always the least expensive way to pay a given policy, and a producer who quotes a monthly figure should be able to explain why twelve of them add up to more than the annual premium.

Florida lists the forms a premium may take. Premiums must be paid in cash consisting of coins, currency, checks, electronic checks, drafts or money orders, or by debit card, credit card, automatic electronic funds transfer or a payroll deduction plan (Fla. Stat. s. 627.4035(1)(a)). If an electronic payment is returned or declined for insufficient funds, the insurer may charge an insufficient-funds fee of up to 15 dollars per occurrence under the policy terms -- but not when the failure resulted from fraud or misuse on the account that was not the policyholder's doing (Fla. Stat. s. 627.4035(1)(b)).

Two mode-related points are easy to miss. The initial premium is normally collected with the application or at delivery, and coverage does not begin until it is paid. And the premium due date is fixed by the mode: on a quarterly mode the fourth-quarter premium is due at the start of that quarter, not at the end of it.

The grace period

Every life insurance contract must give the insured a grace period of not less than 30 days within which any premium after the first may be paid, and during that period the policy continues in force (Fla. Stat. s. 627.453). Most policies grant 31 days, and the principal points are the same everywhere:

• The policy does not lapse on the due date. Coverage continues through the grace period

exactly as if the premium had been paid on time.

• It applies only to renewal premiums -- "any premium after the first." There is no grace

period for the initial premium, because there is no contract to keep in force until that premium is paid.

• Payment during the grace period costs no penalty in coverage. The insurer may, at its

option, charge interest of not more than 8 percent per year for the days of grace that elapsed before payment (Fla. Stat. s. 627.453); it may not treat the policy as lapsed or require evidence of insurability.

• Death during the grace period is a covered claim. The insurer pays the death benefit

and deducts the overdue premium, with interest of not more than 8 percent per year, from the settlement (Fla. Stat. s. 627.453).

• If the premium is still unpaid when the grace period ends, the policy lapses. From that

point the owner is relying on the nonforfeiture provision (if the policy has cash value), an automatic premium loan provision if one was elected, or the reinstatement provision.

The purpose of the grace period is protection for the insured, not a discount for the insurer: an owner who forgets a payment, is traveling, or is briefly short of cash should not lose a contract that may be impossible to replace at the same rating.

How the length varies with the premium frequency

Florida's grace period rules scale with how often premiums fall due. Under the separate provision that governs weekly-premium industrial (home-service) life policies, the grace period is 4 weeks, except that for policies whose premiums are payable monthly it is 1 month but not less than 30 days; any premiums due and unpaid may be deducted from a claim that arises during the grace period (Fla. Stat. s. 627.504). The health insurance provision follows the same pattern with a different scale: not less than 7 days for a weekly premium policy, 10 days for a monthly premium policy, and 31 days for all other policies (Fla. Stat. s. 627.608). Notice that the life rule, 30 days regardless of mode, is the one this objective is about; the 7-10-31 schedule belongs to health policies and is a common distractor.

What the grace period is not

The grace period is not an extension of the due date. The premium was due on the due date; the grace period simply postpones the consequence of missing it. It is also not a free look, a reinstatement, or a waiver of premium: those provisions each solve a different problem and each has its own conditions.