What is the effect of a lapse on a life insurance policy?

A lapse on a life insurance policy occurs when the policyholder fails to make the necessary premium payments. This non-payment leads to the policy becoming inactive, meaning that the coverage provided by the policy is terminated. Essentially, if a policy lapses, the insurer is no longer obligated to provide benefits to the insured or the beneficiaries, which can have significant implications for planning and financial security.

When a policy lapses, it typically means that the policyholder is unable to claim any death benefits or other contractual advantages associated with the policy. To avoid a lapse, many insurance companies offer a grace period, allowing a policyholder some time to pay outstanding premiums before the policy formally lapses. However, if payments are not made within that timeframe, the policy will indeed become inactive, cementing the consequences of missed payments.

Other options present different scenarios that do not accurately reflect the outcome of a lapse. For instance, a lapse does not lead to an immediate increase in coverage amount, nor does it result in waived premiums or a refund to the policyholder. It’s essential to maintain continuous premium payments to keep the policy active and in force, ensuring coverage remains intact.