How to Cancel a Life Insurance Policy
Life insurance is an affordable tool to protect your family financially should you die.
People need life insurance when they buy the policy. Otherwise, they wouldn’t buy it.
Life changes, though.
At some point, it’s possible you may no longer need your life insurance policy.
If you make this decision, you might be wondering how to cancel your life insurance policy.
Here’s what you need to know.
Why You Might Cancel
There are many legitimate reasons you may want to cancel your life insurance policy.
Enough saved up
If you’ve been financially fortunate, you may have saved or invested enough money to no longer need your life insurance policy.
In this case, you may decide that continuing to pay your premiums no longer makes sense.
You can provide for your dependents without life insurance if you pass away.
Lower cost elsewhere
Finding a new policy with lower rates may be another reason to consider canceling.
This might happen if life insurance rates fall overall.
It can also happen if you’ve been working hard and have improved your health by losing weight or quitting smoking.
Switching types of insurance
Switching the type of life insurance you have may be a reason to cancel your policy, too.
Often, people are sold whole life insurance based on fear. In most cases, term life insurance may be a better, and cheaper, fit.
In these cases, people may consider canceling a whole life insurance policy after a new term life insurance policy is in effect.
Financial hardship
Financial hardship is another reason people cancel life insurance policies.
If you have a whole life insurance policy, you may even get money for cashing out your policy.
What to Do Before You Cancel Your Life Insurance
Canceling a life insurance policy is a serious decision.
Don’t take it lightly.
Plan for the impact
First, figure out how canceling a policy could impact your financial plan.
Make sure you’re willing to take on any extra risk before you cancel.
Have the new policy in effect first
If you’re canceling a policy to take advantage of lower rates, make sure the new policy is in effect before you cancel the old policy.
You may think you’re able to get lower rates only to find out a new health condition has popped up. This could increase your rates above what your current policy costs.
By waiting until your new policy is in effect before canceling the old policy, you’ll be confident you can secure the rates you think you can get.
You should read your policy carefully before canceling, especially if it is a whole life insurance policy.
Free look period
If your policy is brand new, it may include information about a free look period.
During this period, which might be up to 30 days, you may be able to cancel and get a refund of any premiums you paid.
The policy should also document important information about what to do if you decide to cancel.
Pay attention to your usual payment due date for premium payments and any grace period the policy offers.
How to Cancel a Term Life Insurance Policy
Canceling term life insurance is fairly straightforward. A term life insurance policy doesn’t build any cash value, so there are fewer variables to deal with.
Due to the way this type of life insurance works, you can usually cancel by stopping premium payments.
Once you miss a payment and its grace period, your policy will usually be canceled. Check with your policy to be sure this will work.
Your policy may also detail information about how to cancel it. You may have to write a letter or submit a cancelation form.
If you don’t see how to cancel your policy, try calling your life insurance company and request cancelation.
They should be able to provide details about the proper way to cancel your policy.
How to Cancel Whole Life Insurance Policies
Whole life insurance, often called permanent life insurance coverage, is a bit trickier to cancel. Another variety of whole life insurance is universal life insurance.
The first thing you should do is read your policy to see how to cancel if you have any of these types of permanent life insurance policies.
You’ll want to pay attention to a few factors.
First, look at the section detailing any surrender charges you may have to pay.
Next, look at the cash value schedule to see how much cash value your policy has built up over the time you’ve had the policy.
These two factors are important because they impact the amount of money you may get back for canceling your policy.
Often, surrender charges will be subtracted from your cash value during the first few years of a whole life insurance policy if you cancel.
If you’ve had your policy long enough, surrender charges may not be taken. Instead, you may get paid the full cash value your policy has built when you cancel.
The cancellation process
Finally, look for the details of how to cancel your policy.
If you can’t find your policy or don’t want to read the contract, you can contact your insurance company to see how to cancel.
Generally, you close your policy by asking to cash it out. This may require filling out forms or making a request over the phone.
Your life insurance company may automatically cash you out if you stop making premium payments.
Because your policy may have a cash value, it’s a good idea to take control of the process. Go through the proper channels to cancel as the policy states you should.
Now:
You may be able to cancel through your life insurance agent, but they may try to convince you to keep your policy.
Life insurance may get paid recurring commissions each year you keep your policy active. It is in the agent’s best interests to get you to keep the policy so they can keep earning those commissions.
Reduced paid-up option
Another option the insurance company may suggest is called a reduced paid-up option.
In this option, you no longer have to pay your life insurance premiums. Your life insurance company takes your cash value and uses it to keep the policy in effect, but at a reduced death benefit.
This means:
You probably won’t get any cash payout from the cash value you’ve built up.
Instead, that money is used to pay for the smaller policy that remains.
Do I Get Penalized for Canceling My Life Insurance?
You don’t typically get penalized for canceling your term life insurance, but it does impact your policy.
Simply:
Canceling your life insurance policy usually means your beneficiaries won’t receive a death benefit if you die during the rest of the policy term.
This is due to the fact the policy will no longer be in effect.
Whole life insurance may impose surrender charges if you cancel your policy before a certain time frame has passed.
In this sense, you could be penalized for canceling early in the policy’s life. Life insurance companies do this so they have enough time to recover the costs of issuing a whole life insurance policy.
Do You Get Money for Canceling Life Insurance?
You may end up getting some money depending on the type of life insurance policy you had and its specifics.
Term life insurance cancellations will almost always result in receiving no money for canceling. The premiums you’ve been paying for years will no longer provide any benefit in most cases.
Whole life insurance is trickier. Depending on how long you’ve been paying premiums and your specifics, you may get the cash value or cash surrender value of the policy paid to you when you cancel.
Can I Switch My Life Insurance for an Annuity?
Technically, it may be possible to change your whole life insurance policy to an annuity.
This could be possible through a section 1035 exchange. Basically, section 1035 allows you to switch certain types of money to a different option without paying taxes.
One option is switching from a life insurance policy to particular annuity types.
To be clear:
These exchanges are complex.
For this reason, you should consult a fiduciary financial advisor.
These professionals can advise you whether it is a good idea for your long term financial plan without being influenced by commissions. They can also go over the details to make sure the exchange is done correctly to avoid taxes.
Consider Consulting a Professional Before You Cancel
Sometimes, canceling a life insurance policy isn’t a clear cut decision. In these cases, it can often help to talk to an unbiased professional to get advice.
Unfortunately, life insurance agents earn commissions from the life insurance company for selling life insurance policies.
Due to this conflict of interest, they may strongly suggest purchasing or keeping life insurance when you don’t need it.
For this reason, consulting with a fiduciary financial planner is often a smart move. Fiduciary financial planners must provide advice that is in your best interests.
Some planners work on an hourly basis, so getting an opinion is as simple as paying a fee for getting your situation analyzed.
Whatever you decide to do, make sure you consider all aspects of canceling your life insurance policy.
If you decide to cancel, do so according to your policy’s guidelines for the best results.
