How to cancel a life insurance policy

Canceling a life insurance policy is a significant decision that can arise for various reasons. You might find that your financial situation has changed, making the premiums no longer affordable. Perhaps you’ve secured a better policy that offers more favorable terms, or maybe you’ve reached a stage in life where the coverage is no longer necessary. Whatever the reason, understanding the process of canceling a life insurance policy is crucial to ensuring you don’t face unexpected consequences. The steps involved can vary depending on the type of policy you have, but rest assured, it’s generally a straightforward process. Bankrate is here to help walk you through the key considerations and steps to cancel your life insurance policy effectively.

How to cancel life insurance

The process of how to cancel life insurance can vary in complexity depending on the type of coverage you have and the length of time you’ve held the policy. If you have a term life insurance policy, the process is generally straightforward, especially if you’ve only recently purchased it. On the other hand, canceling a permanent life insurance policy, such as whole life or universal life, can be more involved, particularly if it has accumulated cash value over time. The ease of cancellation often depends on these factors and your specific situation.

If you recently purchased a policy

If you’ve just purchased your life insurance policy, you’re likely within the “free look” period. This period, which typically lasts 10 to 30 days, depending on your state, allows you to cancel your policy without any financial penalty and receive a full refund of any premiums you’ve paid. The free look period is a critical time to review the details of your policy to ensure it meets your needs. If you decide to cancel, contact your insurance company by phone or in writing to inform them of your decision. After this period ends, canceling the policy might involve more steps, particularly with permanent policies, where you might need to consider the impact on the cash value and any surrender charges.

If you have a term life insurance policy

Term life insurance provides coverage for a specified period, such as 10, 20 or 30 years. It’s a popular choice for those seeking affordable coverage with straightforward benefits. If you decide to cancel your term life insurance, the process is usually pretty simple.

One of the most effective ways to cancel is by stopping your premium payments. Simply stop sending in the checks. If you have automatic payments set up, you may need to call the insurance company to end these transfers. Many policyholders set up automatic payments through ACH (automated clearing house) transfers or electronic fund transfers (EFT).

In general, it’s a good idea to call your insurance carrier directly to confirm the cancellation and ensure there are no further obligations on your part. Most insurers have forms or online options to finalize the cancellation process, making it quick and convenient.

By handling it this way, you ensure the policy is properly canceled and avoid any potential lapses in communication that could leave the policy active with premiums still owed.

Other options if you have a term policy

If you’re considering canceling your term life insurance policy, it could be worth exploring other options before making a final decision.

If you’re thinking about canceling your term policy because you decided you need a more permanent solution, check the terms of your policy. Many term policies automatically include a conversion rider, which allows you to switch to a permanent policy without undergoing a new medical exam. This can be a valuable option if you want lifelong coverage and the ability to accumulate cash value within your policy.

If you’re thinking of canceling your policy because the premiums have become difficult to manage, it might be beneficial to contact your insurance agent. They may be able to help you reduce the policy’s face amount, which can lower your premium payments and make the policy more affordable while still providing some level of coverage.

Exploring these options can help you maintain the protection you need without giving up your life insurance entirely.

If you have a permanent life insurance policy

When it comes to canceling a permanent life insurance policy, the process can be more complex than with a term policy due to the additional elements involved.

Permanent life insurance policies, such as whole life or universal life, are designed to provide lifelong coverage, with maximum coverage ages ranging from 95 to 121, and typically include a cash value component. Because of this, canceling — or “surrendering” — these policies can involve more than just stopping payments.

When you surrender a permanent life insurance policy, you may receive a payout from the cash value, but this is often reduced by surrender charges, especially if you haven’t held the policy for many years. In the early years of the policy, surrender fees can significantly reduce or even eliminate the cash value you receive. Over time, these fees decrease, but it’s important to understand that the cash value might not be as substantial as expected if you surrender the policy prematurely.

If you have any outstanding policy loans, your surrender value will also be reduced by the balance (any unpaid loan plus accrued interest). Additionally, if you made any withdrawals, this permanently reduced the available cash surrender value. Canceling a permanent life insurance policy is a significant decision with potential financial implications, so it’s crucial to fully understand the consequences before proceeding.

Other options if you have a permanent policy

If you’re thinking about canceling your permanent life insurance policy, consider the alternatives first. Permanent policies often come with options that might make it unnecessary to fully surrender the policy.

Using the cash value to pay the premium

One option is to use the accumulated cash value of your policy to cover your premium payments or mortality costs; this will depend on the policy type. Depending on how much cash value you’ve built up, you can withdraw or borrow against it. This could help you keep your policy active without needing to make out-of-pocket payments, especially if you’re facing financial challenges.

However, it’s important to understand the downsides of this approach. Borrowing against your cash value or withdrawing from it can reduce the death benefit your beneficiaries will receive. Additionally, if the loan isn’t repaid, the outstanding amount, plus any interest, will be deducted from the policy’s death benefit. Over time, this could diminish the policy’s value or even cause it to lapse if the cash value is depleted.

Before deciding to use the cash value to pay your premiums, it’s advisable to consult with a financial advisor or your insurance agent to fully understand how this might affect your policy in the long term and to explore any other potential options that might better suit your needs.

Prior to using the cash value to pay the premium, request an in-force illustration from the carrier reflecting your plan. This will help you determine the impact on your policy.

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 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. If you do a 1035 exchange, be sure to follow the insurance company’s instructions, so that you don’t inadvertently end up doing it incorrectly and having the cash value be subject to income tax.

Sell your policy

When selling a life insurance policy, you typically have two options: a viatical settlement or a life settlement. The choice between these two usually depends on your health and financial needs.

• Viatical settlement: A viatical settlement involves selling your life insurance policy to a third party, often when you have a terminal illness and a life expectancy of less than two years. The buyer offers a lump sum payment that is less than the policy’s death benefit but typically more than the cash surrender value. This option can provide immediate financial relief for medical bills, living expenses or other needs during a challenging time. The buyer then assumes responsibility for paying the premiums and receives the full death benefit upon your passing.
• Life settlement: A life settlement, on the other hand, is usually considered by policyholders who are over the age of 65 and in reasonably good health but no longer need the policy or can no longer afford the premiums. In a life settlement, the policy is sold to a third party for typically more than the cash surrender value but less than the full death benefit. This option is generally for those who may need to free up cash for retirement or other financial goals.

It’s important to note that with a settlement, the third-party buyers can request your medical records to determine your estimated life expectancy. If your policy is sold, they can also reach out periodically to inquire about your health.

Both options require working with a reputable broker or settlement company, as they will handle the sale and provide you with offers. The amount you receive will depend on various factors, including your age, health and the size of your policy. Keep in mind that selling a life insurance policy can take several months, and there may be tax implications, so it’s important to consult with a financial advisor or insurance expert before proceeding.

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 financially independently without a death benefit, life insurance may no longer need to be part of your financial portfolio.
• You are changing your investment strategy: You may have realized that the investment options of your permanent 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 an annuity or mutual fund, for example. If you have a permanent 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.
• You are switching policies or insurance companies: If you’ve found a new policy that better suits your needs, it’s important not to cancel your existing policy until the new one is fully in force. This ensures you aren’t left without coverage during the transition period, protecting you and your loved ones from unexpected gaps in protection.

It’s important to view life insurance as part of your broader financial strategy rather than as an investment vehicle. If you were hoping to use life insurance as a way to invest for the future, it might make sense to reassess your need for life insurance and instead look into more effective ways to meet your financial goals, such as investing in savings or retirement accounts. In such cases, reallocating the funds you would have spent on premiums into more growth-oriented investments could be a better option for securing your financial future.

Do you get money back when canceling life insurance?

When canceling a life insurance policy, the possibility of getting money back depends on several factors, such as the type of policy you hold and the timing of your cancellation. If you’re wondering, can I cancel my life insurance policy and get my money back, here’s a breakdown of what you can expect:

Free look period:

• If you cancel your policy during the free look period, which typically lasts 10 to 30 days, you can get a full refund of any premiums paid. This period gives you a risk-free opportunity to reconsider your decision.

Term life insurance:

• No cash value: Term life insurance does not accumulate any cash value over time. Canceling your policy means you won’t receive a payout.
• Partial refund: However, if you cancel in the middle of your payment cycle, you might get a small refund for any unused portion of your premium.

Permanent Life Insurance:

• Cash value payout: Permanent policies build cash value over time. If you decide to cancel whole life insurance or another permanent life product, you could receive a payout based on the cash surrender value.
• Surrender charges: Be mindful that surrendering your policy, particularly in the early years, often incurs surrender charges. These fees will reduce the amount you receive.
• Outstanding loans: If you’ve borrowed against your policy, any unpaid loans will be deducted from the cash value before you receive your payout.
• Withdrawals: A withdrawal permanently reduces your policy’s death benefit and the cash surrender value.

Understanding these factors can help you make an informed decision about whether canceling your life insurance policy is the right choice for you.

Frequently asked questions

• Can you cancel a life insurance policy at any time?

  Yes, you can, although the only way to get a full refund is to do so during the initial “free look” period. After the free look period, if canceling a permanent life insurance policy during the first 10 years or so of owning it, you may be charged a surrender fee.

• How do I know when to stop term life insurance?

  If you no longer have a need for the death benefit coverage, it may be the time to stop term life insurance coverage. This could mean your spouse no longer needs to replace your income, your children are no longer financially dependent or you paid off a debt the term life insurance would have covered. If you do not stop your term life insurance policy, it typically will automatically cancel when the term expires. In some cases, when the level term reaches the end of the period, it may continue either with an annually increasing premium or an annually decreasing death benefit. Be sure to ask your insurer for more information.

• Can I exchange my life insurance policy for an annuity?

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

• Can your insurance company cancel your life insurance policy?

  Yes, your life insurance company can cancel your policy, but it typically only happens under specific circumstances. These include non-payment of premiums, policy misrepresentation, cash value depletion or the policy reaching maturity. If you miss a premium payment and don’t catch up within the grace period, your policy could be canceled. If it’s discovered that you provided false information during the application process, the insurer may have grounds to cancel your policy. If you have taken withdrawals or loans out against your policy’s cash value and it gets too low, your policy may be terminated.

  However, in some cases, it might be possible to reinstate your policy by paying the missed premiums and any applicable fees within a certain timeframe, though this varies by insurer. The insurer may also require proof of insurability, depending on the time frame.

• Can my beneficiaries take over my premium payments?

  Depending on how you arrange the payment logistics, nearly anyone could technically take over your premium payments. One way to approach this is by having your beneficiary send you the money into whichever account you currently pay your premiums out of. Another method might be to have them fill out some paperwork with your insurance company and become an official payor on your policy account.