Canceling your life insurance is a major decision that can happen for a variety of reasons. Your financial situation may have changed and you may find that you can no longer afford the premiums. Maybe you have obtained a better policy with more favorable terms, or maybe you just no longer need the insurance at a certain stage in your life. Whatever the reason, understanding the process for canceling your life insurance is important to ensure you don’t face unexpected consequences. The process varies depending on the type of insurance, but rest assured that it’s usually a simple process. Bankrate will guide you through the important considerations and steps to effectively cancel your life insurance.
How to cancel life insurance
The process of canceling life insurance varies in complexity depending on the type of insurance you have and how long you’ve held the policy. If you have term life insurance, the process is generally straightforward, especially if you only recently purchased it. On the other hand, canceling permanent life insurance, such as whole life insurance or universal life insurance, can be more complicated, especially if it has accumulated cash value over time. The ease of canceling often depends on these factors and your specific circumstances.
If you recently purchased insurance
If you have just purchased life insurance, you are probably in a “free consideration period.” This period varies by state, but is usually between 10 and 30 days during which you can cancel your policy without financial penalty and receive a full refund of the premiums you have paid. The free consideration period is an important time to review the details of the policy to see if it meets your needs. If you want to cancel, contact the insurance company by phone or in writing to inform them of your intention to cancel. After this period ends, there may be more cancellation procedures required, especially for whole life insurance. You may need to consider the impact on surrender charges and surrender fees.
If you have term life insurance
Term life insurance provides coverage for a specific period of time, such as 10, 20, or 30 years. It’s a popular choice for those looking for affordable premiums and easy-to-understand benefits. If you want to cancel your term life insurance, the process is usually very simple.
One of the most effective ways to cancel is to stop paying your premiums. Simply stop sending checks. If you have set up automatic payments, you will need to contact your insurance company to stop these transfers. Many policyholders set up automatic payments through ACH (Automated Clearing House) transfers or Electronic Funds Transfers (EFT).
It is generally a good idea to call the insurance company directly to confirm the cancellation and ensure you have no further obligations. Most insurance companies have a form or online option to complete the cancellation, which is quick and convenient.
Doing it this way ensures that your policy is properly cancelled and avoids any communication gaps that could result in your policy remaining in effect with unpaid premiums.
Other options if you have term insurance
If you’re considering cancelling your term life insurance, it may be worth exploring other options before making a final decision.
If you decide you need a more permanent solution and are thinking about canceling your term insurance, be sure to check the terms of your policy. Many term policies include automatic conversion riders that allow you to convert to permanent insurance without having to undergo a new medical exam. This can be a worthwhile option if you want lifelong coverage and the accumulation of cash value within your policy.
If you are thinking of cancelling your insurance because you are finding it difficult to pay the premiums, it is a good idea to contact your insurance agent, who may be able to help you reduce your premiums, so that you can keep the same level of coverage but pay less and save more.
By exploring these options, you can maintain the protection you need without giving up your life insurance completely.
If you have a whole life insurance policy
When cancelling permanent life insurance, the process can be more complicated than with term insurance because there are additional factors involved.
Permanent life insurance, such as whole life insurance and universal life insurance, are designed to provide lifelong coverage, have maximum coverage ages between 95 and 121 years of age, and usually include a cash value component, so canceling (or “surrendering”) these policies can mean more than just stopping payments.
When you surrender your permanent life insurance policy, you are entitled to 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 days of your policy, surrender charges may significantly reduce the cash value you receive, or prevent you from receiving it at all. Over time, these charges will decrease, but it’s important to understand that if you surrender your policy early, your cash value may not be as large as you expected.
If you have an outstanding policy loan, your surrender value will also be reduced by the balance (unpaid loan + accrued interest). In addition, any withdrawals you make will permanently reduce your available cash surrender value. Cancelling your permanent life insurance is a major decision that can have financial implications, so it’s important that you fully understand the consequences before proceeding.
Other options if you have permanent insurance
If you’re considering canceling your permanent life insurance, consider your other options first. Permanent life insurance often comes with options that prevent you from having to cancel your policy entirely.
Use the cash value to pay your premiums
One option is to use the accumulated cash value of your policy to cover premium payments and death expenses. This varies depending on the type of policy. Depending on how much cash value you have accumulated, you can withdraw or borrow from it. This allows you to keep your policy in force without having to pay out of pocket, especially if you are facing financial difficulties.
However, it’s important to understand the drawbacks to this method. Borrowing against or withdrawing from the cash value can reduce the death benefit your beneficiaries receive. Additionally, if the loan isn’t repaid, the unpaid amount, plus interest, will be deducted from the policy’s death benefit. Over time, the value of the policy may decrease or the policy may lapse if the cash value is depleted.
Before deciding to use cash value to pay your insurance premiums, we recommend that you speak with a financial advisor or insurance agent to fully understand how this will affect your insurance policy in the long term and to explore other potential options that may better suit your needs.
Before using cash values to pay premiums, request a statement of current coverage from your insurance company that reflects your plan, which will help you determine the impact on your policy.
Tax-free exchange
A tax-free exchange (officially known as a 1035 exchange) allows you to cancel one life insurance policy and exchange it for a new one without paying taxes. With a tax-free exchange, you avoid income taxes by canceling your life insurance policy and rolling the money over into a new policy instead of collecting it and putting it in a personal account. Be sure to follow the insurance company’s instructions when doing a 1035 exchange, or you could accidentally exchange it the wrong way and have the cash value subject to income taxes.
Selling insurance
When selling life insurance, you typically have two options: a Biatral Settlement and a Life Settlement. Choosing between these two options usually depends on your health and financial needs.
- Viatical Payments: A viatical settlement is the sale of life insurance to a third party, often when an insured has a terminal illness and has less than two years to live. The purchaser pays a lump sum less than the policy’s death benefit but usually more than the surrender value. This option can provide immediate coverage for medical, living and other necessities during difficult times. The purchaser then assumes responsibility for paying the premiums and receives the full death benefit upon death.
- Life Insurance Settlements: Selling a life insurance policy, on the other hand, is typically considered by policyholders over 65 who are in good health but who no longer need the policy or can no longer afford the premiums. In a life insurance sale, the policy is sold to a third party for an amount usually greater than the surrender value but less than the full death benefit. This option is typically for people who need to set aside cash for retirement or other financial goals.
It is important to note that in the case of a settlement, the third-party purchaser can request your medical records to determine your estimated life expectancy. If the policy is sold, they may also contact you periodically to inquire about your health.
For both options, you’ll need to work with a trusted broker or settlement company, who will handle the sale and provide you with an offer. The amount you receive will depend on a variety of factors, including your age, health, and the size of the policy. Keep in mind that selling life insurance can take several months and there may be tax implications, so it’s important to speak with a financial advisor or insurance professional before proceeding.
When to cancel life insurance
There are a number of reasons why you may want to cancel your life insurance policy. Here are the most common situations in which you may want to stop paying your premiums:
- No more compensation: As your family grows and your spouse or partner becomes financially independent without a death benefit, life insurance may no longer need to be part of your financial portfolio.
- Changing investment strategy: You may have found that investment options for whole life insurance aren’t as good as other financial vehicles for long-term savings. A financial advisor can help you decide whether an annuity or mutual funds, for example, is better. If you have whole life insurance, cashing it in can give you savings to invest in a higher-yield account.
- I can’t afford the insurance: If you’re struggling to pay your life insurance premiums, you may want to consider canceling your policy. Before you cancel, consider the options we outlined above for people in financial difficulty. Using one of these strategies to lower the cost of your life insurance and meet your other financial obligations may allow you to keep your coverage.
- If you change your policy or insurer: If you find a new policy that meets your needs, it’s important not to cancel your existing policy until the new policy is fully in effect. This will ensure you’re not left without coverage during the transition period and will protect you and your loved ones from any unexpected gaps in protection.
It is important to view life insurance as part of a broader financial strategy, not as an investment vehicle. If you are looking to use life insurance as a vehicle to invest in your future, it may be wise to reevaluate your need for life insurance and consider more effective ways to achieve your financial goals, such as investing in savings or retirement accounts. In these cases, reallocating funds you would have spent on insurance premiums to more growth-oriented investments may be a better option for securing your financial future.
If I cancel my life insurance, will I get my money back?
When you cancel your life insurance policy, whether or not you get a refund depends on several factors, including the type of policy and when you cancel. If you’re wondering whether you can cancel your life insurance policy and get a refund, here’s what you can expect.
Free viewing period:
- If you cancel your policy during the free review period, which usually lasts between 10 and 30 days, we will refund the full amount of the premium you paid. This period gives you the opportunity to reconsider your decision risk-free.
Term Life Insurance:
- No cash value: Term life insurance does not accumulate cash value over time, and if you surrender the policy, you will not receive any benefits.
- Partial refund: However, if you cancel mid-payment cycle, you may be given a small refund for unused premiums.
Whole Life Insurance:
- Cash value payment: Whole life insurance accumulates cash value over time, and if you surrender your whole life insurance policy or other permanent life insurance product, you may receive a payout based on the surrender value.
- Surrender charge: Be aware that there are often surrender charges if you cancel your policy, especially early on. These charges will reduce the amount you receive.
- Outstanding loans: If you have borrowed against your policy, the outstanding loan will be deducted from the cash value before you receive any proceeds.
- drawer: Withdrawals will permanently reduce the policy’s death benefit and surrender value.
Understanding these factors can help you make an informed decision about whether surrendering your life insurance is the right choice for you.
