Automatic Premium Loan (APL) prevents lapse by:

The Automatic Premium Loan (APL) provision in a life insurance policy allows the insurer to automatically borrow funds from the policyholder's cash value to cover an overdue premium payment. This mechanism is crucial as it helps prevent the policy from lapsing.

When a policyholder fails to pay their premium by the due date, the APL activates if there is sufficient cash value in the policy. Instead of the policy lapsing, which would result in the loss of coverage, the insurance company uses the cash value as a loan to pay the missed premium. This keeps the policy in force, ensuring that the insured maintains their coverage without needing to make an out-of-pocket payment immediately.

The option of extending the grace period does offer additional time for the policyholder to make a premium payment, but it does not actively provide a solution to prevent a lapse like the APL does. Reducing the face amount and extending the term are not functional substitutes for covering premiums and maintaining the policy’s status, as they alter the contract and the coverage provided, rather than addressing the premium payment directly. Thus, using the cash value to automatically pay missed premiums is the main function of the APL, making it the correct answer.