Policy lapse occurs when a life insurance policy terminates because required premiums are not paid and available cash values, if any, are insufficient to cover ongoing charges. Once a policy lapses, death benefit coverage ends and, depending on the contract type, any remaining cash value may be forfeited or reduced by surrender charges and loans. In permanent policies, lapse can result from underfunding, lower-than-illustrated crediting rates, increasing insurance charges at older ages, or unpaid loan interest. In term insurance, lapse typically follows a missed premium beyond the grace period. Policy lapse is a serious risk in long-duration planning, as clients may lose valuable coverage at the very time protection is most needed, and in some cases may be unable to replace it due to worsened health or higher age.

In real-world servicing, advisors work to prevent policy lapse by monitoring premium notices, educating clients about grace periods, and conducting periodic reviews for universal life and other flexible-premium contracts. When carriers send lapse or pending lapse notices, advisors contact clients to clarify the situation and explore options such as paying overdue premiums, reducing face amount, adjusting planned premiums, or using available cash value to keep coverage in force. For policies with loans, they explain how rising loan balances and interest can accelerate lapse risk. If a policy has already lapsed, advisors may help pursue reinstatement if permitted, which often requires updated health information and payment of back premiums. Understanding policy lapse dynamics allows advisors to design more resilient funding strategies, encourage regular reviews, and protect clients from the financial and emotional shock of unexpected loss of coverage.