You can cancel your life insurance policy simply by calling your insurance agent and telling them you want to cancel. Failing to make your premium payments has a similar effect, since the insurance provider will cancel your policy for you.
If you feel you need to cancel your life insurance policy even though you don’t want to, you have other options available. A whole life policy may have enough cash value to use for premium payments. You can also speak to your insurance agent about lowering your premiums to make them more affordable. Doing this will lower the death benefit of the policy, but it will keep your life insurance in place.
When Is the Right Time to Cancel a Life Insurance Policy?
The right time to cancel a life insurance policy is when you no longer need the financial security it provides. Many people purchase life insurance to make sure that life’s big bills are covered if they pass away. They want to ensure that their spouse or dependents won’t be stranded with a mortgage or college costs and no way to pay them. Dual-income families may want to take out life insurance policies on both spouses’ lives to replace income if one of them dies.
In addition, some people take out life insurance policies to pay their debts when they die, including student loan debts, some of which are not discharged upon death. They may also take out life insurance to cover their funeral costs.
If you no longer have concerns about meeting these bills, you may want to cancel your life insurance policy. For example, if you’ve paid off your mortgage or student loans and your children have completed college, those reasons for life insurance no longer exist.
If your mortgage is paid in full, or your family’s savings and supplemental income is large enough to keep up with payments, your beneficiaries may no longer have any need for the death benefits provided by a term life policy. In this case, you may choose to cancel your policy so you can direct the money paid for premiums elsewhere. Some people also cancel their life insurance policies when they realize their retirement or supplemental income will be enough to pay their bills and funeral expenses.
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What Happens When You Cancel Your Life Insurance Policy?
The effects of canceling your policy depends largely on what type of life insurance policy you have. If you have any type of permanent life insurance, such as whole life or universal life, your policy has been accruing cash value while you paid the premiums. When you cancel, or surrender, this type of policy, you should receive its cash value at the time of cancellation. Typically, you’ll receive your money within a month or so.
The cash you receive is counted as income by the IRS, and you will have to pay taxes on it (even though life insurance death benefits are tax-exempt). If you haven’t held the policy for very long, you may have to pay surrender fees, which might wipe out any gains you would otherwise receive.
If you cancel a term life insurance policy, you simply stop paying the premiums. A term policy has no cash value, so you won’t receive any payout for it.
Are There Penalties Involved With Canceling a Life Insurance Policy?
You may incur penalties for canceling your life insurance policy depending on the type of policy and when you cancel. Most whole life policies stipulate a surrender period, which may run anywhere from 2 to 10 years. During this time, you may not receive any cash value if you cancel your policy. You can also expect to pay surrender fees for canceling, which may be hefty, often starting at 10% of the annual premium.
After the surrender period, the surrender fees for canceling a policy are reduced each year. By the end of 10 years, you should be able to cancel your policy with no surrender fee. There are no surrender fees or penalties for canceling a term life insurance policy.
Can You Cancel a Term Life Insurance Policy?
Yes. All you need to do to cancel a term life insurance policy is to stop paying the premiums, and the insurance provider will cancel it for you. You can also call your life insurance agent to let them know you are canceling the policy.
Can You Cancel a Permanent Life Insurance Policy?
You can cancel a permanent life insurance policy, but you may have to pay surrender fees to do so. If you have had your policy for a significant period of time, typically more than 10 years, you should be able to collect the cash value of the policy when you cancel it. Some insurance providers offer an in-between option, allowing you to retain the policy and some death benefits, with your equity paying the premiums.
Instead of Canceling, Can You Sell Your Life Insurance Policy?
If you meet the requirements, you may be able to sell your life insurance policy in lieu of canceling it. To be eligible to sell a life insurance policy, you must be the owner of and insured on a policy worth at least $100,000, and you must be at least 65 years old. If you’re under 65 but have a significant health issue, you may also be eligible to sell your policy.
You can expect to receive about 50% to 75% of the death benefit offered by the policy. The exact amount is based on the amount of the death benefit, your life expectancy and health condition, the rating of your life insurance provider, and the length of the policy’s term, if it’s a term life policy. The buyer of the policy receives the rest of the proceeds.
Most people selling their life insurance policies work with brokers who specialize in this technically complex type of investment. Brokers will connect you with interested buyers, taking a fee for their services.
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Do You Get Money Back if You Cancel Your Life Insurance Policy?
If you have term life insurance, you won’t get any money back. If you have built up the cash value in your permanent life insurance because you’ve had the policy for over 10 years, you’re likely to get the cash value back, minus any surrender fees. The amount you get back will be smaller than the death benefit attached to the policy.
Key Takeaways About Canceling Life Insurance
- You can cancel your life insurance at any time, but whether you receive any money for it depends on what type of policy you have and how long you’ve held the policy.
- Term life insurance is easy to cancel, but you won’t receive any benefits for doing so.
- If you cancel permanent life insurance, you may receive the cash value of the policy, minus any surrender fees, which diminish each year of the policy.
