Lapse

A lapse is the termination of a life insurance policy for nonpayment. On term and whole life, it happens when a premium isn't paid by the end of the grace period. On universal life, it happens when the cash value can no longer cover the monthly cost-of-insurance and other charges, which can occur even if you've been paying the planned premium.

What happens next depends on the policy. A term policy simply ends with no value. A whole life policy with cash value usually doesn't vanish: if you don't choose otherwise, a nonforfeiture option takes effect, often extended term insurance, or an automatic premium loan pays the bill. Say, hypothetically, a whole life policy with $20,000 of cash value lapses. That value might buy a smaller paid-up policy, or keep the full face amount in force as term coverage for a number of years.

Most policies allow reinstatement within a set period, often three to five years, if you pay back premiums with interest and usually show you're still insurable. To avoid an accidental lapse, use automatic payments and name a second person to receive lapse notices. See what happens if you stop paying life insurance premiums and reinstating a lapsed life insurance policy.