So far (touch wood) in 50+ years of performing, I rarely forget the words of a song, but it happens to most of us now and then.

One thing I never do is stop or pause or break the flow of a performance if I can help it. I'll sing something even if it's near gibberish, just to preserve the flow! An audience can be very forgiving. The secret of not forgetting words is, of course, in the thread title: PRACTISING songs - over and over again - until the words are embedded.

I suppose you could say that ad-libbing is part of the Folk Process; singer A changes the words slightly; singer B hears and copies B's version and also changes a bit. And so on...

By contrast, I played in a 1950s-style rock'n roll trio for some years, back in the 1980s, and I can tell you that dyed-in-the-wool rockers are sticklers for their music being performed word perfect. I was once taken to task very severely at a dance by an irate girl who enumerated every incorrect word I'd innocently substituted for a correct one in a particular song!