Everyone's needs change with time; what once worked in the past may not be necessary in the present, including life insurance policies. Life insurance policyholders are not legally obligated to continue life insurance coverage and may cancel or surrender their policies anytime. Whether you receive a cash benefit from the policy upon cancellation depends on your policy type.
Most life insurance policy provisions include a free look period, which gives the policyholder time to examine the policy before deciding to purchase.
Life insurance companies apply policy nonforfeiture options to ensure owners do not lose their cash value or a death benefit upon surrendering their permanent life insurance policy.
Canceling a term life insurance policy is easier than canceling a permanent one because insurers and policyholders have to handle the cash value of permanent policies.
Can you cancel a life insurance policy?
Once your life insurance policy is in place, it's usually best to keep it for several reasons. If you intend to get another policy later, premiums increase as you age. Some states have replacement rules, and you must provide proof of insurability. However, when your needs change and life insurance is no longer a priority, you can cancel it without a penalty.
Life insurance contracts are unilateral; only one party to the contract is making a guarantee that can be enforced. There is no legally binding agreement for the policyholder to pay premiums. Policyholders pay premiums at will and may terminate premiums without legal repercussions. However, they are left uninsured.
Standard life insurance policy provisions include a free look period, also called the right to examine period. The amount of time required for this provision varies from state to state. Still, policy owners are typically given 10 to 30 days from delivery to review the policy and decide whether to keep it.
Financial hardship is one reason life insurance policyholders cancel. It's common for people to make career changes that may result in a reduction in income, and premiums are no longer affordable. Permanent life insurance policyholders may choose to surrender their policy for the cash value, at which point the policy is canceled. Other reasons to cancel a life insurance policy are because the incentives at the time of purchase are longer relevant.
Reasons why you would cancel life insurance
Policyholders may cancel if the policy benefit no longer serves its purpose. The list below shows the primary reasons people buy life insurance and why they may cancel it.
- Divorce or loss of the policy's beneficiaries. Survivor protection is a common reason people buy life insurance. Policies benefit surviving family members to ensure they meet a lifestyle standard after the insured dies.
- The assets are exempt from estate taxes or when the estate becomes the means of inheritance. Life insurance is often used to preserve or create an estate. Life insurance may cover estate taxes so the policy's beneficiaries do not have to sell assets to pay them and ensure they have an inheritance.
- Change in financial planning and/or savings and investments. For living benefits, permanent life insurance assigns a portion of your premiums to collect interest as cash value.
- When debts and estate taxes are covered with personal finances. Exempt from probate and creditors, the funds of life insurance benefits bypass probate and, through the spendthrift clause, are exempt from creditors. The spendthrift clause is a provision that states the death benefit can't be claimed by creditors until it is paid to the policy's beneficiaries.
- Beneficiaries become financially secure. Life insurance provides financial security. The insured can have peace of mind knowing their families will not struggle with financial hardship when they die.
Other reasons policyholders may choose to cancel thier polices include:
- Buyer's remorse. Paying premiums on a life insurance policy is a commitment. Policyholders may feel as if they made the commitment too soon, didn't purchase the right policy, or for numerous other reasons have feelings of anxiety about their purchase.
- Viatical settlement and terminal or chronic illness. Life insurance policyholders have the right to transfer ownership of their policies. A viatical settlement is designed to provide the existing policyholders a sum of money if they are diagnosed as terminally or chronically ill. To do this the policyholder sells the policy to a third party through a viatical settlement provider. A viatical settlement provider buys the policy for less than the face value, usually 50% to 80% of the death benefit, then becomes responsible for the premiums, and receives the death benefit once the insured passes away.
While reasons to cancel a life insurance policy vary from person to person, the process you must take to cancel the policy depends on the policy itself.
How to cancel life insurance: step-by-step guide
Term life insurance policies last for a predetermined time and do not have a cash value component. If you have a term life insurance policy, you can cancel your policy by contacting the insurer or simply stop paying premiums, and the policy will lapse after the grace period. There are no fees to cancel.
To cancel term life insurance:
- Contact your insurer to cancel the policy, or stop paying premiums.
- If you cancel after making a payment, you may receive a partial refund depending on when you cancel the policy in the payment cycle.
To cancel whole life insurance, the policy will need to be surrendered. Because whole life insurance is designed as permanent, it features a savings and investment component that the policyholder can use as a living benefit. When you surrender the policy, the insurer pays the accumulated cash value to the policyholder, ending the contract.
To cancel whole life insurance:
- Contact your insurer to cancel the policy.
- Life insurance companies may charge surrender fees that can be taken out of the policy's cash value. Usually surrender fees decrease as the policy ages.
- The cash value of the policy is usually paid in a lump sum. Check with your insurer to know when the cash value will be delivered. It could be as little as two weeks or up to two months.
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Insurers charge surrender fees to prevent losing money when a policy is surrendered for the cash value. These fees typically lessen the longer the policy is in force and may eliminate the cash value entirely if you surrender the policy within the first few years. Alternately, surrender fees may drop to zero if the policy is active for a long period of time. Surrender fees differ between insurers; check your policy or with your life insurance company to understand their terms. Furthermore, the cash value you receive may be taxed as income.
The table below demonstrates the differences between canceling a term, and a whole life insurance policy.
|Type of insurance
|How to cancel life insurance policy
|Term life insurance
|Contact the insurer by phone or by mail. Some insurers may also provide an online cancellation form.
|No cash value
|No cancellation fees
|Permanent life insurance
|Contact the insurer by phone or by mail. Some insurers may also provide an online cancellation form.
|Policyholders own the cash value and insurers must give them the cash value of the policy once it is surrendered.
If I cancel my life insurance do I get money back?
Term life insurance policyholders may receive a portion of their last premium, depending on when the policy was canceled and the payment cycle ends. Permanent policyholders own the cash value of their policies and it cannot be denied. Life insurance companies offer nonforfeiture options to obtain cash value and provide other options besides life insurance cancellation.
Rethinking cancellation: exploring other options
Life insurance policy cancellation rules pertain primarily to insurers. The National Association of Insurance Commissioners provides model laws for the proper termination of policies by the insurance provider and policy replacement. Replacing a life insurance policy with a new one may not always be in the insured's best interest. Further evidence of insurability and satisfaction of a new contestability period may be required, and the new policy will not have current cash value.
Options to avoid losing cash value or coverage
Life insurance companies offer nonforfeiture options, so the insured does not lose cash value or coverage. Three standard nonforfeiture options exist: cash surrender, extended-term insurance, and reduced paid-up insurance.
- The cash value surrender option allows the policyholder to surrender the policy and receive the cash value.
- An extended term insurance nonforfeiture option enables the insurer to apply the cash value of a permanent policy toward buying a term life insurance policy that lasts for the amount of time the cash value buys.
- A reduced paid-up insurance nonforfeiture option applies the policy's cash value to a single premium permanent life insurance policy of the same type. The death benefit will be the amount the cash value buys as a single premium at the insured's age. These policies do not require further premiums, and the cash value will continue to grow at a reduced rate.
Universal life insurance policies permit partial surrenders. A partial surrender is when a portion of the policy is surrendered for a part of the cash value. The policy's death benefit is reduced to the amount of the surrender.
Policyholders may also want to consider using the policy's cash value or dividends to cover their premiums, an automatic premium loan, lowering the death benefit, a life settlement contract, retaking the medical exam, or a tax-free exchange, in lieu of canceling their policies.
- Universal life insurance policies do not have nonforfeiture options because the policy will remain in force as long as there is enough cash value to cover the cost.
- Life insurance dividends are an excess of invested premiums. If the investments perform well insurers may return a portion of the premiums paid to the policyholder.
- An automatic premium loan (APL) is an optional provision of a life insurance policy or may be added to the policy as a rider. An APL allows the insurer to provide a loan to pay the policy's premiums, if the policyholder is unable to, at the end of the policy's grace period.
In order to lower premiums, you may lower the death benefit which will subsequently lower the policy's premiums. Policyowners may sell a portion, or all of the policy's death benefit, or ownership of their policy in a life settlement contract. A life settlement contract is an agreement between the policy owner and a third party, usually a life settlement provider. The life settlement provider provides a sum of money to the policy owner then assumes premium payments, and is the policy's beneficiary.
- Life insurance policyholders may also consider retaking a medical exam to see if they may be approved for more affordable premiums.
- A tax-free exchange, allows policyholders to exchange their policies for another life insurance policy or annuity.
Life circumstances change, and life insurance policyholders may no longer need coverage or can no longer afford premiums. Insurers provide nonforfeiture options to help policyholders keep a benefit amount or cash in on cash value. Learn more about life insurance benefits and options here on Healthnews.
Can I get my money back if I cancel my life insurance?
If you have a term life insurance policy, you may be entitled to a partial amount of the last premium you paid, depending on when you cancel. Permanent life insurance policies can be surrendered for their cash value. Insurers may charge a surrender fee to avoid financial loss from canceled policies.
Can you cancel term life insurance?
Life insurance contracts are unilateral. The insurer must legally pay the death benefit if the policy is in force when the insured dies. Still, insureds are not legally required to pay premiums and continue coverage. Term life insurance may be canceled without consequence besides lost premiums.
What is the penalty for canceling a life insurance policy?
Permanent life insurance policyholders may pay a surrender fee for the cash value when they surrender the policy. How much depends on how long you've had the policy and the rules stated by the insurer. There's no fee for canceling term policies, but once you cancel, you are left unprotected and may have lost money in premiums.
Can I cancel my policy and get a new one?
Yes, however, strict rules are placed upon insurance companies regarding replacement because replacing one policy for another may not be in the policyholder's best interest.