What occurs when a universal life insurance policy's cash value cannot cover monthly deductions?

When a universal life insurance policy's cash value cannot cover the monthly deductions, the policy lapses. In universal life insurance, the cash value serves as a reservoir from which policy costs, such as the cost of insurance and administrative fees, are deducted each month. If the cash value becomes insufficient to cover these monthly costs, and the policyholder does not make additional premium payments, the policy will enter a lapse period.

A lapse means that the policy is no longer in force, and the coverage will terminate if no action is taken to reinforce the policy. This is different from cancellation, which is a more definitive termination of the policy, and also distinct from automatic renewal or lowering premiums, which do not typically apply in this scenario if the cash value is insufficient.

Understanding the mechanics of how universal life policies operate is essential; the interplay between cash value and monthly deductions directly influences the policy's active status.