What does a "lapse" in an insurance policy mean?

A "lapse" in an insurance policy refers to a termination of coverage due to non-payment of premiums. When an insured party fails to make the required premium payments within the specified grace period, the insurer may cancel the policy, resulting in a loss of coverage. This lapse means that the policyholder is no longer protected against any risks covered by the policy, leaving them vulnerable until coverage is either reinstated or a new policy is purchased. Understanding this definition is important, as it highlights the necessity of timely premium payments to maintain ongoing insurance protection.

The other options are not aligned with the definition of a lapse. A reduction in coverage limits, for instance, refers to a change in the terms of the policy, while the process of renewing a policy involves continuing coverage typically through a new term or agreement. A type of dividend payment to beneficiaries would relate more to terms of policy benefits rather than the status or maintenance of the policy itself.