What Is a Lapse?
In finance and insurance, a lapse is the ending of a contract because its holder has not met the requirements needed to keep it in force. The term is most often used for insurance policies, where a lapse usually happens when the policyholder fails to pay the insurance premium on time and does not fix the missed payment within the allowed period. It is also used for options, where a contract that reaches its expiration date without being exercised or closed is said to lapse.
How a Policy Lapse Happens
Most insurance contracts include a grace period, a window after a missed due date during which coverage usually continues. If the premium is still unpaid when the grace period ends, the insurer may terminate the policy. Some permanent life insurance policies can instead use accumulated cash value to cover unpaid premiums automatically, which can delay or prevent a lapse. The exact rules depend on the contract.
A lapse is generally not neutral for the holder. Coverage stops, so a claim made after the lapse is typically not paid. Policies that have built cash value may offer a nonforfeiture option or a surrender value, but the amounts and terms vary by contract.
Lapse in Options
In options trading, a contract lapses when it reaches its expiration date with no value left and no action taken. An out-of-the-money option usually expires worthless, so the buyer loses the premium paid for it. This is a normal end to an option's life rather than a cancellation.
Why Lapses Matter
Insurers and analysts track lapse rates, the share of policies that end early, because they affect an insurer's revenue and the stability of its business. Individuals may also face a lapse when they stop paying for a policy they still need. Some policies allow reinstatement after a lapse, usually within a set time and often with proof of insurability and back premiums. The rules differ by insurer and by policy.
Updated October 26, 2026. For general education only; not financial, tax or legal advice.