What is meant by "insurance lapse"?

The term "insurance lapse" refers specifically to a situation where the policy coverage ends because premiums have not been paid. When a policyholder fails to keep up with the payment schedule required for their insurance, the insurer typically allows for a grace period during which the policy remains in force. However, if premiums are not paid by the end of this period, the policy will lapse, meaning the coverage is no longer active, and the insured is no longer protected against risks that the policy was originally intended to cover.

This concept is crucial for policyholders to understand, as a lapsed policy can lead to significant financial consequences, such as lack of coverage during a loss event. Additionally, if a policy lapses and the insured wishes to reinstate it later, they may face higher premiums or stricter underwriting requirements.

The other options describe different insurance-related circumstances but do not accurately define a lapse. For instance, reduced coverage denotes a potential adjustment to the policy rather than a complete termination, while a temporary suspension indicates a still-active status, and an option to cancel without penalties involves policyholder choice rather than an involuntary lapse due to payment failures.