How to Cancel Your Life Insurance Policy
While protection from the unexpected is a necessary component of all financial plans, there may come a time when you should cancel life insurance, as it is no longer the right fit for your objectives.
Canceling life insurance is a relatively simple process. But before you do so, it is important to know the proper way to go about it, as well as what your alternative options may be. Otherwise, you could end up leaving money on the table.
A Couple Ways
There are a couple of ways that you can cancel life insurance. One option is to just stop paying the premiums on the policy. If you go this route, eventually the policy will lapse, and the coverage will end.
You could also contact your company or your agent and request a policy cancellation. Depending on the type of policy you have, as well as how long you have owned it, you may or may not be entitled to a refund.
Can I Cancel Term Life Insurance?
Canceling a term life insurance policy is fairly easy. In this case, if you do not pay your premium before the “grace period” ends, the coverage will be canceled. You could also contact your insurer by phone, or provide written notice to the insurance company that requests cancellation of your policy.
In your letter or phone call, make sure that you include information such as:
- Your policy number
- The effective date of the policy cancellation
- Your address (to return any of the unused premium, if applicable)
A good deal of insurance companies today also have a policy cancellation form available on their website. Because term life insurance only provides death benefit coverage (and no cash value component), there is no “cash surrender value” when you cancel the policy. So, unless you cancel the policy before the next premium due date, it is not likely that you’ll receive any of your money back.
Can I Cancel Permanent Life Insurance?
If you want to cancel permanent life insurance, there are some additional steps involved. One reason for this is because permanent insurance policies can all have slightly different rules for surrendering them.
As with canceling a term life insurance policy, you should ideally contact your carrier in order to cancel a permanent life contract. Depending on the policy and the length of time you have owned it, you may receive at least some of your cash value back.
The amount of your refund could be diminished, though, if the policy is still in its surrender period. This refers to a period of time – usually several years – when you would incur a penalty for canceling the policy. (You could also incur a surrender penalty if you take out “too much” cash value – usually more than 10% – as a withdrawal, even if you keep the policy in force).
In addition, you may also be taxed on any of the gains that you receive. Because the cash in a permanent life insurance policy is allowed to grow tax-deferred, Uncle Sam will take his portion of the money when you withdraw it.
In addition, because the cash value in a whole life insurance policy grows slowly during the first few years, you may find that your refund – if any – is much smaller than the amount of money you paid into the plan.
In lieu of canceling a permanent life insurance policy, you might consider some alternate options. For instance, some insurance companies will allow you a “reduced paid-up” plan. This can allow you to stop paying the policy’s premiums, and to keep a policy that has a smaller death benefit on it.
You may also be able to “convert” your permanent life insurance policy to term insurance coverage that provides death benefit protection only, without any cash value build-up. If you do this, be sure to keep in mind that the term life insurance will only last for a specified period of time.
Can I Cancel Whole or Universal Life Insurance?
Whole life and universal life insurance are both types of permanent coverage. This means that they both can accumulate cash value. However, these policies have a few key differences, as well.
For instance, with whole life insurance, your premium amount is locked in. You also receive a guaranteed cash value accumulation. Whole life will remain in force for the remainder of your lifetime, provided that you continue to pay the premium.
With universal life, though, there is more flexibility in terms of the death benefit, premium payment, and even the savings, or cash value, element. As an example, a universal life insurance policyholder may (within certain guidelines) change the amount and timing of the premium payment – and may even be able to skip paying the premium altogether and fund the coverage via the policy’s cash value.
While both whole and universal life insurance policies can be canceled, it may make sense to first contact your insurance carrier or agent in order to learn about what your other options may be.
If I Cancel My Life Insurance, Do I Get Money Back?
Whether or not you get money back when you cancel a life insurance policy will be dependent on the type of coverage you have, as well as how long you have owned the policy. For instance, after you purchase an insurance contract, you have a “free look” period that typically lasts for between 10 and 30 days.
If you cancel the policy within its free look period, you can receive a refund of the premium you paid in. The free look period on life insurance will begin on the day that you receive your policy. Once your free look period has elapsed, you may or may not receive a premium refund.
What Are My Other Options?
There are many reasons why you might want to cancel your life insurance. If you do so, however, it could end up costing you. So, before you move forward with a policy cancellation, it is important to know what your other options may be.
One could be to simply reduce the amount of death benefit coverage. This could allow you to pay a lesser amount of premium, yet still, provide a financial “cushion” to loved ones down the road.
Another alternative could be to do a life settlement transaction. In a life settlement, you sell your life insurance policy to a third party. The amount that you receive will typically be less than the death benefit, but more than the policy’s cash surrender value.
Not everyone will qualify for a life settlement, though. For example, the insured must typically be at least age 65 or older and / or in poor health. If you are eligible, though, a life settlement transaction could net you more money that simply canceling or surrendering your policy.
Is Cancelling Your Policy the Best Option for You?
If you still aren’t sure whether or not canceling your policy is the right decision for you – or, if you want to compare your other potential options – talk with an expert who can provide you with more information.
At Insurance Geek, we know life insurance! We’re also affiliated with more than 30 top life carriers, so we can help you to determine whether canceling coverage makes sense, or if there is an alternative that would better fit your short- and long-term financial objectives. So, contact us today to find out more.