If an insured allows a permanent policy to lapse, what action will most insurance companies take?

When an insured allows a permanent policy to lapse, most insurance companies will automatically institute the extended term option, which is the correct action in this context. This option allows the policyholder to convert the accumulated cash value of the permanent policy into a term insurance policy, maintaining the same face amount but for a limited period. This is beneficial because it provides the insured with continued life insurance coverage without requiring additional premiums, allowing them to avoid an immediate loss of coverage.

The extended term option gives policyholders a chance to keep a level of life insurance in force even if they can no longer afford to pay the premiums on the original permanent policy. This option is pre-determined and is typically part of the policy’s provisions.

In contrast, canceling the policy completely would result in the loss of all benefits and coverage. While most policies do come with a grace period to allow late premium payments, this is usually a short time frame (often 30 days), and does not address the situation of letting the policy lapse. Converting the policy into a term policy would not typically occur without the use of an option like extended term; doing so unilaterally wouldn't reflect standard policy practices. The automatic extension of coverage through the extended term option is a safeguard to provide