PSI Life Exam Practice Test 2026 - Free Life Insurance Exam Questions and Study Guide

When a policyholder stops paying premiums, the policy may enter a grace period before it lapses. During this grace period, which typically lasts around 30 days, the policyholder can still make a payment without loss of coverage. If the premium is not paid by the end of the grace period, the policy may lapse, meaning the insurance coverage ends and the insurer is no longer liable for claims made under that policy.

This process provides an opportunity for the policyholder to restore their coverage by paying the overdue premium. However, if they do not take action within that timeframe, they risk losing the benefits of the insurance policy entirely.

In contrast, some of the other options do not accurately reflect the common outcomes of not paying premiums. For instance, the idea that the policy automatically terminates does not account for the grace period that many policies provide. Similarly, the insurer covering the premiums for a year isn’t standard practice, and converting cash value to an annuity does not typically happen solely due to missed payments. Therefore, entering a grace period or lapsing is the most accurate description of the consequences of stopping premium payments.