What does the term ‘lapse’ refer to in the context of insurance?

In the context of insurance, the term 'lapse' specifically refers to the termination of a policy due to non-payment of premiums. When a policyholder fails to pay their insurance premiums by the due date, the insurance company may allow a grace period during which the insurer will continue coverage. However, if the premiums remain unpaid beyond this period, the policy will lapse, meaning that the coverage provided under that policy ceases to be in effect.

This understanding is crucial for policyholders to maintain their coverage and avoid unexpected gaps in insurance protection. Lapsed policies can leave individuals or businesses exposed to risks they thought were covered, which emphasizes the importance of timely premium payments. Other options, such as extending the policy duration, adding coverage, or reducing premium rates, involve adjustments or modifications to the policy rather than its termination, highlighting the critical nature of maintaining payment obligations to keep a policy active.