What might occur if a cash value insurance policy lapses due to non-payment of premiums?

When a cash value insurance policy lapses due to non-payment of premiums, one potential outcome is that the policy may still be reinstated under certain conditions. Many insurance policies include a reinstatement provision, which allows the policyholder to bring the policy back into force within a specific timeframe after lapse, typically by demonstrating insurability and paying any missed premiums along with interest.

The reinstatement option is crucial as it allows policyowners to recover their coverage without having to apply for a new policy. This could be beneficial in situations where the individual’s health has changed since the original policy was issued, possibly leading to higher rates or denial of coverage for new applicants.

In contrast, losing all accrued cash value is not accurate since most policies retain some residual value even after lapse if the policyholder chooses certain options like using the cash value for paid-up insurance. The automatic conversion to a term policy does not happen; while some policies offer conversion options, a lapse does not trigger this by default. Lastly, the death benefit is not typically paid out in full immediately upon lapse; coverage generally ceases, and unless reinstated, there is no death benefit provided.