How To Cancel Your Life Insurance PolicyEverything you need to know about canceling life insurance and if it is the right decision for you.
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People end their life insurance policies for a number of reasons.
The good news is that canceling it is usually quite simple, depending on what kind of policy you have. You can either decide to stop paying your premiums or you can surrender your policy.
In this article, we will discuss how to cancel a life insurance policy, what happens when you do, and when it is a good decision.
Can I Cancel a Life Insurance Policy?
In most cases, you can cancel your life insurance policy at any time. You can either tell your insurance company or stop paying your premiums to do so.
Canceling a term life insurance policy is quite simple. Permanent policies, however, can be complicated and time-consuming to cancel, because they have two components: life insurance and investments.
Term vs. Permanent Life Insurance
Term life insurance provides standard insurance and only protects you for a limited number of years.
Permanent (whole and universal) life insurance provides lifelong protection and adds a cash value component that you can tap into during your lifetime—as long as you keep making your premium payments.
How to Cancel a Term Life Insurance Policy
To cancel your coverage, you can call your insurer, write a letter, or fill out a cancellation form. The steps are as follows:
1. Get in touch with your life insurance company and ask for information about canceling your plan.
2. When you cancel, remember to include your:
The date you’d like to cancel your coverage
3. If you have set up automatic payments with your bank or insurance company, you should stop them on the date of cancellation.
4. Check in with your insurance company if you don't hear back from them in a few business days.
Can I Convert My Term Life Insurance to Whole Life?
It is possible to change your term life insurance policy to a permanent policy before the end of the prescribed deadline.
This deadline can be within the first five or 10 years of taking out the policy, or before you reach your 60th, 65th, or 70th birthday, depending on the insurance company. It won't be possible to convert your coverage after the deadline has passed.
How to Cancel a Whole Life Insurance Policy
As a result of a whole life insurance policy having an investment component, canceling it is a little bit more complicated. You'll need to contact your insurance company. You will have a few options to cancel, depending on:
Your insurer's rules and regulations.
How long you've had the policy.
Some of these options include:
1. Surrendering the policy: You might be able to give up your policy and get back any cash value you've built up. It is possible that you'll have to pay a fee if you cancel the policy, especially in the first 10 to 20 years after you took it out.
For the first two to three years, the premiums are usually very high, in order for the insurance company to make up the costs of selling and setting up the plan. After that, the surrender fees are usually cut by a percentage each year for the first decade.
Example of Policy Surrender
Suppose your surrender penalty was 10% in the first year that you owned your policy. It might be 9% in the second year, 5% in the fifth year, and 1% in the tenth year. You'll find all of these options and how much they cost in your policy documents.
In this case, when you cancel your policy, you'll get the "cash surrender value.” The longer you own your policy, the more money you'll get.
2. Choosing a reduced paid-up option: You may be able to stop paying your insurance premiums but for a lower death benefit. Your beneficiaries will get a lump sum payout when you die.
3. Selling your policy: You might be able to sell your policy to a third party for a one-time payment. It's called a "life settlement," and the person who buys the policy becomes the beneficiary and owner of the policy and takes over the premium payments.
It is important to remember that the money you get is usually less than the money your family would have gotten when you die.
How to Cancel Your Life Insurance
Every life insurance policy has a free look period, which varies by U.S. state. During this period, you can cancel your life insurance plan.
The free look period is the allowed time period in which a new life insurance policy owner can still terminate the policy without any penalties, such as surrender charges.
A free look period is usually between 10 and 30 days, depending on the insurer.
If you decide that you don't want to keep the policy during this time, you can contact your insurance company to cancel it and get your premiums back in full.
However, after the free look period, the process of canceling will depend on the type of policy that you have.
If you decide to cancel a whole life insurance policy and you want to ensure that you receive the cash value component you are owed, it’s best to write a cancellation of insurance policy letter, including the following information:
Your full name
Your policy number
Date your cancellation of insurance letter
Brief statement explaining that you wish to cancel your life insurance coverage, and why
Effective date of when the policy should be canceled
Request that the cash value is returned (including the mail-to address)
To cancel your whole life policy you can send a fax or email, or upload the letter canceling your life insurance. Keep a copy of the letter and the receipt to prove that you’ve sent it.
When Should I Cancel My Life Insurance Policy?
There are a lot of reasons why you might want to cancel your life insurance plan. However, always remember that your life insurance policy should be part of a bigger plan for providing financial security to your family after you die.
Here are some examples of when it makes sense to stop paying for life insurance:
You No Longer Need Coverage
If your family is all grown up and your spouse or partner can manage on their own without a death benefit, you may not need life insurance anymore.
You Are Changing Your Investment Strategy
You've decided that the investment options that your whole life insurance plan offer are not good enough for long-term savings.
If you want to know if an annuity or mutual fund is better for you, one of our life insurance agents can help you figure that out. A whole life policy could give you the initial amount of money needed to invest in a better-paying option if you cash it in.
You Cannot Afford the Premiums
If you can't pay your life insurance premiums, you might think about canceling your plan.
Alternatives to Canceling Life Insurance Coverage
A Tax-Free 1035 Exchange
A tax-free 1035 exchange (or Section 1035 exchange) is a way for a taxpayer to get rid of an annuity or life insurance policy and get a new one without having to pay any taxes.
The IRS lets you do this type of exchange so that life insurance policies and annuities that no longer fit your financial situation can easily be replaced with new ones that do.
For it to be a 1035 exchange, the insurer must move funds from one contract to another. You will be taxed on any surrender fees or cash that is received from your old policy.
Term Life Insurance Policy
Purchasing a new term life policy
If you decide to renew your term life insurance, the premiums will be higher. So, if you are in good health it might be a better option to get new life insurance. It might cost more, but the premiums will be less than the renewal prices.
Converting term life to whole life coverage
In some cases, if you don't have as many needs as before, you can convert your term life policy into whole life. This will give you a lower death benefit, but you will have lifelong coverage.
Select a less expensive option
An example of this would be switching from a whole life insurance policy to term life insurance. However, keep in mind that this will shorten the length of your coverage.
Do You Get Money Back When Canceling Life Insurance?
Term life insurance policies don’t repay any money you paid in premiums if you cancel your policy. Within the free look period, you can cancel your term life insurance policy and get your money back. However, after that, the company keeps all the money you paid them.
Permanent insurance policies, such as whole life or universal policies, on the other hand, have a cash value account that is yours.
Insurance companies can keep all (or most) of the cash value you've built up if you try to cancel before the "surrender period" is over.
Chances are high that you will get most of your money back from your insurance company if your policy is out of the surrender period when you cancel it.
Can Your Life Insurance Company Cancel Your Policy?
It's very rare for a life insurance company to cancel your insurance, but it can happen.
One of the most common ways you could lose your policy is if you don't pay your life insurance premiums. If you still haven’t paid your premiums during the grace period, there is a very high chance of your policy being canceled.
What Is the Grace Period?
A grace period allows a life insurance policy owner to make a premium payment after the due date without any loss of coverage.
Depending on the insurance policy, a grace period can be as short as 24 hours or as long as 30 days. The amount of time granted in an insurance grace period is indicated in the insurance policy contract.
Fraud is giving false information or being deceptive. If your insurance company finds you guilty of fraud with regard to the personal information they’ve asked from you, they might cancel your policy. When you start a new policy, the insurance company has two years to claim fraud and cancel your policy.
The first two years after you sign up are called the contestability period. Companies have the right to look into your application if they think you lied or omitted important information.
An insurance company can't cancel your policy for any reason other than fraud or nonpayment.
A person’s health situation changing from when they first bought the policy can’t be used as a reason to cancel their policy.
Where Can I Learn More about Different Life Insurance Policies?
If you need to cancel your life insurance because you can't afford it, or your needs have changed, you have the right to do so.
Before you cancel your life insurance policy, look into other ways to stay insured. You might be able to find a cheap solution that works for you.
If you’re still interested in canceling your life insurance policy, head to PolicyScout’s life insurance hub. We have loads of articles that will help you understand cancellation, costs, different plans, and coverage.