First, this is not a "problem", it's just how it works, even if it prevents you from doing some things you would like to be able to do.
"Block connections w/o VPN" is an OS setting, that does what it says very literally (with one exception that doesn't seem relevant to your question).
"Allow LAN traffic" is a VPN app-level setting, that does what it claims to do as far as the VPN app is concerned, but that doesn't mean the VPN app can bypass an OS-level restriction.
Panther5362 Does this allow apps to access the internet without going through the VPN?
In general, no - apps are not able to just decide that they want to bypass the VPN. The importance of that toggle is to block internet access in situations where the VPN isn't running, crashes, etc.
Whether that is important to you is going to depend on why you're using a VPN.