Chartered Life Underwriter Practice Exam 2026 - Free CLU Practice Questions and Study Guide

When a life insurance policy is described as 'lapsed,' it signifies that the policy has been terminated due to the failure to pay premiums on time. Each life insurance contract has specific provisions regarding premium payments, and if the insured fails to make the required payments within a designated grace period, the policy becomes inactive. Once a policy lapses, the insured loses coverage and cannot make claims on the policy, unless certain reinstatement conditions are met.

In this context, a lapsed policy does not refer to any status where the policyholder has fulfilled their financial obligations (such as paying in full) or has upgraded the policy. Furthermore, it is not the case that the policy remains active but with reduced benefits; once it lapses, it is no longer valid or effective. Understanding the implications of a lapsed policy is crucial for policyholders to ensure continuous coverage and avoid gaps in their life insurance protection.