General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
A life insurance policy lapses when it terminates for nonpayment of premium after the grace period. Cancellation, in contrast, refers to:
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
Cancellation is the termination of a policy during its term, before the policy period has run, and it can be initiated by either the insurer, when policy terms or law allow, or by the insured. A lapse is a distinct event: the policy ends because the insured fails to pay the premium when due and the grace period expires without payment. Because both events end coverage, agents must be precise about which event occurred, since reinstatement options and any surrender values depend on the distinction between them.
Why the other options are wrong
- A) Lapse and cancellation are different events with different causes. Lapse is nonpayment, while cancellation is an early termination by a party. Nonpayment produces a lapse while a party's affirmative act produces a cancellation, so the two are not the same event.
- C) A policy maturing is the policy fulfilling its stated purpose. Maturity is a natural completion, not an early termination by a party. Maturity is the natural end of the policy term, not an early termination by either party.
- D) Reducing the face amount is a policy change that adjusts coverage. It does not terminate the contract at all. Reducing the face amount alters coverage but leaves the policy itself in force.
Memory hook
Lapse = you stopped paying. Cancellation = someone ended the term early. Different doors, same empty room.