What does it mean for a policy to lapse?

A policy lapsing indicates that the insurance coverage is terminated as a result of non-payment of premiums. When policyholders fail to pay their premiums within the specified grace period, the insurance company may cancel the policy, which means the policyholder no longer has coverage. This scenario is significant as it serves as a reminder for policyholders to stay current on their premium payments to maintain coverage and protect themselves and their assets.

The other options do not correctly represent what it means for a policy to lapse. For instance, a policy remains active with no changes when premiums are continuously paid. An immediate payout refers to a policy’s claim benefits rather than its status, and an increase in value pertains to the possible growth of certain types of policies, like cash value in whole life insurance, rather than a lapse in coverage. Thus, the understanding that a policy lapses due to non-payment is critical in the context of managing insurance policies.