This phrase is often used in religious situations to describe a person's pure state often after reconciliation with God. He lived his life in a state of grace, devoted to his faith.
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Spiritual Peace
When someone feels at peace spiritually, they may describe themselves as being in a state of grace. During meditation, she found herself in a state of grace.
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Not Just Catholic
While associated with Catholicism, it can apply to other religions or spiritual beliefs. The monk lives in a state of grace according to his own spiritual traditions.