What happens if a life insurance policy lapses?

When a life insurance policy lapses, it means that the policyholder has stopped making premium payments, resulting in the termination of coverage. However, due to regulations and the design of many life insurance contracts, the insured may retain specific benefits thanks to nonforfeiture values. These values are provisions built into whole life or universal life insurance policies that allow the policyholder to recover some of their investment or benefits even after the policy has lapsed.

Typically, nonforfeiture provisions include options such as a cash surrender value, a reduced paid-up policy, or an extended term insurance. This means that the policyholder does not lose everything completely but instead has options to convert some of the policy's value into another form of coverage or cash.

In contrast to other options, lapsing a policy does not typically mean the policyholder immediately loses all benefits, nor does it allow for automatic renewal without penalties or conversion into a smaller plan without action from the policyholder. Understanding nonforfeiture values is crucial for policyholders so they can make informed decisions about their insurance and what happens in the event of a lapse.