How to Cancel a Life Insurance Policy
You can cancel a life insurance policy but the process will vary depending on whether you are canceling a term life policy or a whole life policy. Read your insurance contract carefully to find out what your options are for canceling coverage.
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Life insurance coverage is a valuable financial asset. It can help ensure your loved ones are provided for if you pass away and your family can no longer count on the income you were earning or the services you were providing. And, if you’ve chosen a whole life insurance policy, your life insurance can serve as an investment vehicle that helps you to save for your future.
Although it often makes sense to buy and maintain life insurance coverage, there are some circumstances in which you might decide you no longer want to keep your policy.
The insurance may become too expensive, your family may no longer need the protection, you may decide your whole life policy is not a good investment, or you may have other reasons for deciding you no longer want to maintain coverage. Whatever the reason, carefully consider whether canceling is, in fact, the best option for your situation — especially since you may not be able to get a new policy at a similar price at another life insurance company.
If you’re confident canceling is the right financial move, this guide will help you understand how to cancel life insurance correctly.
On this page:
- Read Your Life Insurance Contract
- Term Life Versus Permanent Life Insurance
- How to Cancel Life Insurance
Read Your Life Insurance Contract
If you’re considering canceling your life insurance policy, the first step is to read the contract you have with the insurer. Your contract should specify the terms and conditions of the policy, including whether it can be canceled.
In general, life insurance policies can almost always be canceled. After all, an insurer can’t force you to maintain coverage and keep making premium payments once you’ve decided you no longer want to have a policy in effect.
Of course, when you cancel, the insurer will be off the hook as well. This means that with a term life policy, and sometimes with a whole life policy, no death benefit will be paid to your family if you pass away in the future, no matter how long you paid for premiums before canceling coverage.
Although you can cancel your policy, your life insurance contract may impose consequences for doing so — such as surrender fees for whole life policies.
That’s why it’s so important to carefully review all of your policy documents to determine what will happen when you terminate your coverage. If you can’t find the relevant clauses in your insurance contract, or if you need a copy of your policy to review, consider contacting your insurance company as soon as you decide to discontinue coverage.
Canceling Term Life Versus Permanent Life Insurance
The specifics of the life insurance cancellation process will usually vary not just by policy, but also based on the type of policy you have.
Term life insurance policies pay a death benefit only for a limited period of time. They aren’t investments and the policy doesn’t accrue any value. Whole life insurance policies, or permanent life insurance policies, are different.
Whole life policies are intended to remain in effect indefinitely and also to serve as an investment. Because of this, you pay more in monthly premiums for a permanent life insurance policy than the cost to insure you. The added money you pay in is invested but the specifics of how vary depending on the type of policy you have. Your insurance policy accrues independent value separate from the death benefit.
With whole life policies, your policy has acquired value, so you can’t just cancel coverage. You need to select an exit strategy, which could include taking the cash value and discontinuing your involvement with the insurance company; changing your policy so it’s in effect for a shorter term and you keep the existing death benefit; or discontinuing paying premiums but receiving a reduced death benefit based on the amount you paid in so far.
Since term life policies don’t have a cash value and the only purpose of them is for you to pay premiums in exchange for a death benefit being paid out if you die, the policies are fairly easy to cancel. You could just stop paying premiums, or you could call your insurer and request for that coverage to be discontinued, with no additional steps to take.
How to Cancel Life Insurance
Canceling Term Life Insurance
If you have a term life policy, while you could just stop paying premiums, this is often the worst way to cancel because the insurer will likely reach out to you to try to collect payment so your coverage doesn’t lapse. If you don’t want to be hassled, you can just call the insurance provider.
The term life insurer may be able to just take care of the cancellation over the phone, or you may be asked to submit some forms either online or via mail documenting that you’re discontinuing your policy. As soon as your cancellation goes into effect, you’ll owe nothing more, and you will receive no death benefit if you pass away. You don’t need to have any other involvement with the insurer.
Canceling Whole Life Insurance
If you’re canceling a whole life policy, on the other hand, you will need to contact the insurer to specify which exit strategy you would prefer.
If you still need life insurance, switching to a shorter-term policy — or reducing your death benefit but keeping the coverage in effect — could be your smartest move. If you want no coverage at all, though, you’ll need to choose the option to simply take the cash out and discontinue your coverage.
Be aware that when you cash out early, you’re going to lose some of the value of the life insurance policy because you’ll likely have to pay surrender fees. The specific surrender fee will vary depending upon how long the insurance was in effect, as well as the life insurance company’s rules for surrendering.
In most cases, if you surrender a whole life policy within the first two or three years, the surrender fee will be so substantial your policy will likely be worth little or nothing when you cash out. The surrender fee goes down each year the longer you have the policy, though, so you could eventually get a substantial sum when you cancel your coverage and take the cash value.
Your insurance agent can help you understand how much money you’d get if you took the cash value, as well as what your options are for preserving the death benefit and the protection it provides to your family.
Canceling Life Insurance is Possible
If your family or financial situation changes, you can cancel your life insurance coverage. Make sure you understand what you lose by discontinuing coverage, however, including what will happen to your death benefit.
Read your current policy carefully before you act, and understand that once you have given up coverage, you may not be able to get a similar policy for the same price. If you know canceling is right for you, you can follow the advice in this guide on how to cancel life insurance for an easier process.
Author: Christy Rakoczy