Policy Lapse: What Happens When Life Insurance Premiums Stop (LLQP)
A policy lapse is the termination of an insurance policy because the premium was not paid by the end of the grace period — typically 30 or 31 days after the due date. During the grace period coverage stays fully in force; the day after it ends, an unpaid policy lapses and coverage is gone.
One critical exception: term insurance with no cash value simply dies at lapse. Permanent policies with cash value don't just vanish — non-forfeiture options kick in.
Why it matters on the LLQP exam
Lapse questions test a small ecosystem of connected rules:
- Grace period — if the insured dies during the grace period, the death benefit is still paid, minus the overdue premium. Classic calculation question.
- Non-forfeiture options (permanent policies) — the cash value must go somewhere: cash surrender, reduced paid-up insurance, or extended term insurance (usually the automatic default). Know all three and which one is automatic.
- Automatic premium loan (APL) — if elected, the insurer pays the missed premium from the cash value as a policy loan, preventing lapse entirely.
- Reinstatement — a lapsed policy can usually be reinstated within a set window (often two to three years) by paying arrears with interest and providing new evidence of insurability. Reinstatement is generally better than buying new, because the original age and rates are preserved — but the contestable and suicide periods restart. The exam loves that last point.
Trap: reinstatement requires proving insurability again; a client whose health declined may not qualify — which is why agents stress keeping policies in force.
Example question
An insured dies 20 days after missing a premium payment, within the grace period. The beneficiary receives:
- Nothing — the policy had lapsed
- The full death benefit
- The death benefit minus the overdue premium
- Only the premiums paid to date
Answer: C — coverage continues through the grace period; the unpaid premium is deducted from the proceeds.
Connect this with insurable interest and viatical settlement in the life insurance hub.