Maryland Life and Health Insurance License Practice Exam

What effect does a grace period have on a policyholder's insurance coverage?

1. Coverage is automatically extended for 30 days

2. Allows for late premium payment without policy lapse

3. Provides coverage only for accidents during the grace period

4. No effect on the policyholder's coverage

The correct answer is: Allows for late premium payment without policy lapse

A grace period is an important feature in insurance policies that allows policyholders some flexibility in making premium payments. The correct answer highlights that a grace period enables policyholders to make late premium payments without causing a lapse in their insurance coverage. During the grace period—which is typically 30 days—if the policyholder does not pay the premium by the due date, their coverage remains in effect. This means that even if the payment is delayed, the policyholder is still protected under the policy, allowing time to settle the payment without risking a loss of coverage. The other options suggest limitations or misunderstandings about what a grace period entails. For instance, stating that coverage is automatically extended for a specific duration without mention of premium payment ignores the core aspect of the grace period; it is not merely an extension, but a safeguard against immediate cancellation due to late payment. Similarly, the implication that the grace period provides special coverage for accidents or has no effect at all does not accurately reflect the protective function it serves for the policyholder’s ongoing insurance coverage. The key takeaway is that the grace period is a critical mechanism ensuring that policyholders are not penalized too harshly for late payments, thereby maintaining continuous coverage.