What occurs when a policyholder does not pay their premium by the end of the grace period?

When a policyholder fails to pay their premium by the end of the grace period, the policy may lapse unless an automatic premium loan is enacted. The grace period is a specified duration after the premium due date during which the policyholder can still make their premium payment without losing coverage. If payment isn’t made by the end of this period, the policy typically becomes inactive. However, many insurance policies include an automatic premium loan provision, which allows the insurer to use any accumulated cash value in the policy to cover the unpaid premium. This keeps the policy in force and prevents it from lapsing.

The concept of an automatic premium loan is particularly important for policies that have a cash value component, such as whole life insurance. If such a loan is not utilized, the policyholder risks losing their insurance coverage, as the policy may lapse without the premium payment being made. Thus, the potential for a lapse exists unless the automatic premium loan is specifically enacted to cover the outstanding premium.