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People buy life insurance for a purpose, whether it is to replace income, cover debts, send a child to college or for many other reasons. Sometimes, it makes sense to cancel a life insurance policy if the need has been satisfied, like children growing up or paying off debt. Regardless of your reason to cancel a life insurance policy, it is relatively easy to do. The process depends on the type of life insurance policy you have.
Life insurance options if you have financial struggles
Rising inflation, job loss, job stagnation and other misfortunes are causing many to have financial struggles. With less money to go around, it could mean you can no longer afford your premiums. While canceling your life insurance policy may be the right choice, it is not the only option you have available if you are struggling financially.
Depending on the type of insurance policy you have and when you got it, these options may be a better solution than canceling your life insurance policy:
- 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 changed your mind about 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 canceling 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.
However, if you think you may need the death benefit in the future, there is an alternative that could be a better option. Instead of surrendering the policy, you could use the cash value as collateral and take a policy loan. It keeps the death benefit intact but gives you the cash infusion you need now. 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 when the insured passes away and the beneficiary requests the proceeds from the policy.
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.
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, since the broker expects a commission for selling it. But if you need cash, it may be a good option. Keep in mind that it can take a few months to sell a life insurance policy.
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 canceling your policy. Before you do, consider the options laid out above for those with financial struggles. You may be able to keep the policy in force by using one of those strategies to lower the cost of life insurance to meet your other financial obligations.
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, it might make sense to 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 cash value component or 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 permanent 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 or outstanding loan balance 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 it. 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. Keep in mind, if you cancel whole life insurance in the first 10 or 20 years, you may have to pay surrender fees, which can greatly reduce the lump sum you get from the insurance company.