Tennessee Insurance Practice Exam

Which option would ensure the continuation of coverage in a life insurance policy if payments are missed due to a lapse?

1. Automatic Policy Loan

2. Extended Term Option

3. Paid-Up Option

4. Auto Reinstatement

The correct answer is: Automatic Policy Loan

The option that ensures the continuation of coverage in a life insurance policy after missed payments is the automatic policy loan provision. This feature allows the insurer to automatically use the policy’s cash value to cover overdue premiums, thus preventing the policy from lapsing. By doing so, the policyholder can maintain insurance coverage even if they forget to make a payment or experience financial difficulties. In contrast, extended term options, paid-up options, and auto reinstatement provisions are designed for different purposes. The extended term option allows a policyholder to convert the cash value of a whole life policy into term insurance for a specified period after the policy has lapsed. The paid-up option typically allows a policyholder to stop paying premiums and instead receive a reduced paid-up policy, maintaining life insurance without further payments but at a lesser benefit. The auto reinstatement option refers to a feature that allows policies that have lapsed due to non-payment to be reinstated automatically within a certain period if the policyholder pays the past due premiums and meets specific conditions. However, these options do not actively prevent the lapse when payments are missed.