How to cancel a life insurance policy

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Whether you purchased your life insurance policy last week or several decades ago, you may at some point decide that it is no longer in your best interests to have it. Fortunately, cancelling a life insurance policy should be easy.

Depending on the type of policy you have, you can either stop paying the premiums, or surrender your policy. Like with auto insurance, you can typically cancel a life insurance policy at any time, and you usually do not have to pay a cancellation fee.

Your life insurance policy during COVID-19

Some might say it is more important than ever to have solid life insurance coverage during the coronavirus pandemic, but what do you do if you have been furloughed or laid off and are no longer able to pay your life insurance premiums? Can you keep the policy but make arrangements with your insurer that work better for you?

You have some options here, depending on the type of insurance policy you have and when you got it:

  • If you have a whole life policy, and you have had it for at least a decade, you may have built up enough cash value in the policy to be able to use your dividend payments to pay your premiums.
  • If your health has improved since you purchased a life insurance policy, you can request a new medical exam to prove that you are in better shape and thus eligible for lower premiums. This is a good option if you have quit smoking or no longer have a health issue that you had in the past.
  • Talk to your insurer about whether you can lower your rate of coverage. Some companies will allow you to reduce the amount of death benefit — from $500,000 to $100,000, for example — to allow you to take advantage of lower premiums. If, after the pandemic passes, you find yourself in better financial shape, you can always request an increase in coverage back to your original amount.

How to cancel life insurance

Canceling a life insurance policy is typically not hard. You have the right to cancel anytime during the free look period, which lasts anywhere from 10 to 30 days depending on what U.S. state you live in. If you realize within that period that you have made a mistake by buying the policy, you can call or write to your insurer to cancel and any premiums you have paid will be fully refunded.

After the free look period, however, how you cancel depends on the type of policy you have.

Canceling a term life insurance policy

Term life insurance, as the name suggests, provides coverage during an agreed-upon term of time, such as 10 or 20 years. Premiums tend to be low for this type of insurance, and the coverage features a simple death benefit and no investment vehicles within the policy.

Can you cancel term life insurance? Canceling your term policy couldn’t be easier: just stop paying your premium and write a letter or call your insurer to let them know you are canceling the policy. Check the website of your insurer, too — there may be a form there you can fill out to terminate your policy.

Surrendering a whole life insurance policy

Whole life insurance is different from term insurance in a couple of ways. It never expires, for one thing, and the premiums are usually higher than for term insurance. The big difference, though, is the investment component: a portion of the money you pay in premiums goes to build up equity in the policy, which you can draw on during your lifetime.

What does it mean to surrender your life insurance and can you cancel surrender whole life insurance? Surrendering life insurance means that you want to opt out or cancel your life insurance policy. Surrendering or cancelling your policy may mean that you might get a check from your insurer — but only if you’ve had the policy long enough to build up cash value. If you surrender in the first ten years or so, fees will probably eat up any value that you have. If your policy is older, however, and you find yourself in need of money more than you are in need of a life insurance policy, you may be able to cash in your policy for a payout. Policyholders with cash value also might be able to take out a policy loan and use the policy’s cash value as collateral for the loan to avoid surrendering your policy. However, it’s worth noting that if the loan is not repaid, typically, the principal amount of the loan and any accrued interest is taken from the policy’s death benefit.

Some insurers allow you to modify your policy so you keep some death benefits while paying a reduced premium or no premium at all, with all fees being paid by your equity in the account. But beware: if you just stop making payments without an agreement in place with your insurer, the policy could lapse. So in this case, talk to your insurance agent to see what options are allowed by your policy.

Other options for a whole life insurance policy

If you do not want to surrender your whole life insurance policy, there are a few alternatives you might consider. One option is to look into a tax-free life insurance policy exchange, and another is to sell your life insurance policy for profit.

Tax-free exchange

A tax-free exchange, formally called a 1035 exchange, allows you to get rid of one life insurance policy and replace it with a new one, without paying taxes. With a tax-free exchange, you surrender your whole life insurance policy, and instead of collecting the money and depositing it into your personal account, you roll it over into a new policy, therefore avoiding income taxes.

Sell your policy

Another option if you no longer need a whole life insurance policy is to sell it. But keep in mind that this process can be complicated. You will need to find a few reputable brokers who will purchase the policy from you, and then get offers from each of them. The amount of money you can get from selling your whole life insurance policy varies, but if you need cash fast, it may be a good option.

When to cancel your life insurance policy

There are a number of reasons why you might want to cancel your life insurance policy. Here are some of the most common situations when it could make sense to stop paying for it:

  • You no longer need coverage: If your family is grown and your spouse or partner is able to manage on their own without a death benefit, it may be that life insurance does not need to be part of your financial portfolio any longer.
  • You are changing your investment strategy: You may have realized that the investment options of your whole life policy are not as good as another financial vehicle for long-term savings. A financial advisor can help you determine if you would be better off with, say, an annuity or mutual fund. If you have a whole life policy, cashing it in could give you a nest egg to invest in a higher-interest-bearing account.
  • You cannot afford the premiums: If you are struggling to afford your life insurance premium, you may think about cancelling your policy. But whether due to coronavirus or some other financial setback, we suggest you look at the suggestions in our COVID-19 section of this report because there may be steps you can take to keep the policy but lower the cost of life insurance.

A good thing to remember is that your life insurance policy should be part of a greater financial strategy that you have in place to provide a secure future for yourself and your loved ones. If there are better ways to do that, by all means cancel your policy and invest the money you would have paid in premiums into another savings vehicle.

Do you get money back when canceling life insurance?

The answer to this question is that it depends. If you have a term life insurance policy, which has no investment option, the only possibility of getting money back is if you cancel in the middle of your payment cycle. Then, you may receive a check for any premium that has not yet been applied to your account — which is going to be a very small amount compared to the policy’s death benefit.

If you have a whole life policy, and you have equity built up in the policy because you have been paying into it for a decade or more, you may receive a lump sum payment from your insurer. They will subtract any fees out of this payment and send you the rest of the cash value of your policy. This, too, will probably be far less than your death benefit.

You lose your premium payments

It’s important to know what the consequences are for canceling life insurance. When it comes to your premium payments, it depends on the life insurance. In most cases your premium payments will be forfeited, and you will not receive anything for your previous payments.

The one exception to this is if you have whole life insurance and cancel in the first 10 to 20 years. You may have built up equity for all of the payments you have made so you may receive a lump sum payment from your insurer.

Frequently asked questions

Can you cancel a life insurance policy at any time?

Yes, you can, although the only way to get back all your premium payments is to do so during the initial “free look” period.

How do I know when to stop term life insurance?

There’s no one right age, but some people cancel their policies when they are older and don’t need to leave a death benefit for their children or spouse.

Can I exchange my life insurance policy for an annuity?

Yes, you can. The IRS calls this a 1035 exchange, and it allows you to do a tax-free transfer of your policy into an annuity or long-term care policy.

What happens when you cancel a life insurance policy?

Generally, there are no penalties to be paid. If you have a whole life policy, you may receive a check for the cash value of the policy, but a term policy will not provide any significant payout.

Can your insurance company cancel your life insurance policy?

Your life insurance company can cancel your life insurance under very specific circumstances. One of the main reasons that an insurance company would cancel your life insurance policy is from non-payment, especially during the grace period. Your policy can also be cancelled if your insurance company finds out that you lied on your application, which is considered fraud.

Can my beneficiaries take over my premium payments?

If you cannot afford your life insurance premium, you can have your beneficiaries take over the payments for you. This would need to be an arrangement between you and them. However, you should first make sure that your beneficiaries are able and willing to take over the payments so they can receive the death benefit after you pass away.

Is it possible to convert my term life insurance policy to a whole life insurance policy?

Many term life insurance policies are convertible, which means you can convert the policy into a permanent whole life policy when the term ends. Typically, you can only convert the policy if you have a conversion rider, which some policies include for free. It is a good idea to talk to your insurance company and find out if your term life policy is automatically convertible, or whether you will need to purchase a specific rider.

Written by
Mary Van Keuren
Insurance Contributor
Mary Van Keuren has written for insurance domains such as Bankrate.com, Coverage.com and Thesimpledollar.com for the past five years, specializing in home and auto insurance. She has also written extensively for consumer websites including reviews.com and myslumberyard.com. Prior to that, she worked as a writer in academia for several decades.
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