If you no longer want to continue with your coverage, you may be wondering, Can you cancel life insurance? Or maybe you’re currently investigating how to cancel life insurance policies in case you decide to stop yours in the future.
Whatever your reason, this post will guide you through the cancellation processes for both term life and whole life insurance policies. We’ll also provide some alternatives to canceling your policy.
First, Can You Cancel a Life Insurance Policy?
You can usually cancel your life insurance policy at any time if you decide that you no longer want or need the life insurance coverage it provides. How that’s done will vary, based on how long you’ve had the policy (meaning, if it’s brand new or not) and whether it’s term life or whole life insurance policy.
How to Cancel Life Insurance
In each state, there’s a “free look period,” during which you can cancel a life insurance policy for any reason by appropriately informing the insurer. You can find timelines of the free look period in your policy. A typical period will last 30 days from when your policy begins, but it can be as short as 10 days, depending upon the state in which you live.
If you cancel during this timeframe, you’re entitled to a refund of your first premium payment without penalty. After the free look period ends, how you cancel your life insurance policy will depend on what type of life insurance it is. (Though there are other types of life, we’ll focus on term and whole life insurance here.)
Canceling Your Term Life Insurance Policy
Term life insurance guarantees payment of a predefined death benefit when the policy owner dies during a specified term. After the term ends — perhaps after 10 or 20 years — the policyholder might renew the life insurance for another term, decide to let the policy end, or convert it to a whole life policy. Or, before the policy’s term ends, you can cancel the policy. Here’s how.
Inform the Insurer
Check the insurance company’s website to see if they have a termination form, or write them a letter to let them know you are canceling your policy. You could also call your provider to get the process started. It’s really that simple when it comes to communicating your desire to cancel with the insurer.
Stop Making Your Payments
If you’re having the payment automatically deducted from an account, check to see how much notice you have to give the financial institution to stop the next payment. The Consumer Financial Protection Bureau offers advice on stopping automatic payments.
It’s true that, if you simply stop making your premium payments, the insurer will void your policy. How long that would take would depend upon the policy’s conditions. Although this may be the easiest route to take, informing the insurance company ties up loose ends.
Canceling Your Whole Life Insurance Policy
A whole life insurance policy never expires (as long as the premiums are paid). Policyholders typically pay a higher premium, with a portion of the amount being invested. The invested funds can then be drawn upon by the policy owner. Because of this, you actually surrender a whole life policy when you want it to stop rather than cancel the policy.
Consider the Cash Value
As you pay into this policy, you’ll gradually build up cash value. It may take 10 years or so for that to happen but, when it does, surrendering (canceling) your policy may mean that you’ll get a check from the insurer for the cash value built up in the policy.
Investigate Collateral Approach
If a whole life policy has a reasonable amount of cash value, then the policy may be able to be used as collateral for a loan instead of surrendering it. If the loan isn’t repaid, then the outstanding balance and interest owed would be deducted before the death benefit was paid out to beneficiaries.
Modify Your Policy
Your insurance company may allow you to reduce your whole life premiums (or even stop paying them) while still maintaining some (or all of the) death benefits for your beneficiaries. In those cases, the premiums would be paid out of the cash value in the policy. Talk to your agent first, though, to make sure this is doable.
Do You Get Money Back if You Cancel Life Insurance?
With a term life insurance policy, when you cancel, it’s unlikely that the insurer will refund any premiums made and the death benefit to beneficiaries no longer exists. So, with term life, the answer is “no.”
With a whole life policy, though, if you’ve built up cash value, that will be provided to you after you surrender the policy, although any surrender fee is typically taken out first. When you cancel a whole life policy, ask how much money will be refunded as well as when and how you’ll get any funds back.
When Should You Cancel a Life Insurance Policy?
People cancel their policies for a variety of reasons. Here are some examples of when it may make sense to cancel your life insurance policy:
You no longer need it: Some people simply may feel they no longer need the policy — perhaps because the dependents listed as beneficiaries are no longer in need of this money, or because they, the policyholders, no longer have debt that would need to be paid off.
Your premiums are straining your budget: Other times, the premiums are too much for the person’s budget, so they decide to cancel. Perhaps, through this action, they can also collect on the policy’s cash value for needed funds.
You can qualify for a better rate on a new policy: A policyholder may have made lifestyle changes (stopped smoking) or their health may have improved — and so they can now qualify for a better rate on a new life insurance policy. Keep in mind that, depending on how old you are, the premium may be the same or higher than the lower-rated policy.
You want to invest your premiums in another way: As another reason, some people cancel a whole life insurance policy and then invest the premiums paid (and any cash value refunded to them) in another way where they hope to earn more money.
Alternatives to Canceling Life Insurance
Talk to your insurer to see what options exist if you plan to cancel your life insurance policy. One possibility already mentioned in this post is to see if you can have your whole life premiums paid out of your cash value in part or in full.
Or, if you think you still need life insurance but the premiums are too high for your budget, you can consider ways to adjust your budget to keep making your payments. For example, there may be subscriptions for streaming services or online tools that you automatically pay for but seldom use. You could consider canceling those services and continuing to make your life insurance premiums with those newly available funds.
Another possibility, if you’d like to cancel a life insurance policy and then buy another one that’s better for you, is to consider looking into what’s called a tax-free 1035 exchange. This can allow you to make the switch without tax consequences.
Also, check your policy to see if life settlements are permitted. In that situation, the policy is transferred to a new owner, and you could receive cash in a lump sum. Just make sure to explore tax consequences if this option appeals to you.
The Takeaway
You can cancel a life insurance policy, and it’s pretty easy to do. Whether or not you’ll get money back depends on the type of policy you have. With a term life insurance policy, there isn’t any cash value and so you wouldn’t typically get any refund. With a whole life insurance policy, if you’ve paid enough into the policy to have cash value, then you would usually get some money back after surrendering the policy.
Reasons why someone cancels a policy vary and there are alternatives to canceling. If you’re looking into buying a life insurance policy, SoFi has teamed up with Ladder to provide competitive term life insurance that’s easy to understand and quick to set up.
Photo credit: iStock/PeopleImages
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Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, Social Finance. Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under Ladder Life™ policies. SoFi is compensated by Ladder for each issued term life policy.
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