How To Cancel A Life Insurance Policy: Whole and Term Life Insurance Policy
There are specific procedure required to follow regarding how to cancel a life insurance policy. This same idea applies whether you applied for a term life insurance policy or whole life insurance policy.
Technically, the methods available on how to cancel a life insurance policy differs in respect of which policy was applied for. This is because canceling term life insurance is much simpler compared to when cancelling whole life insurance policy.
Despite this, either of the insurance policy can be cancelled by the policy holder.
How To Cancel A Life Insurance Policy
In this article, we’ll be considering the acceptable ways on how to cancel a life insurance policy for both whole and term policies.
How To Cancel A Whole Life Insurance Policy
Canceling a whole life insurance policy usually requires more than just stopping payments. This is because, different forfeiture rules regulates and guides both life insurance policy.
Hence, if you are deciding on how to cancel a life insurance policy for a while plan, you options will certainly depend on the duration of owning the policy and the rules that governs the insurance company in question.
Regarding how to cancel a whole life insurance policy, there are three options:
1. Policy Cash Out
2. Policy or Coverage Lapse
Another option on how to cancel a life insurance policy for a whole plan is to automatically cash your whole life policy and let the coverage lapse if you stop making payment.
However, this may eventually results to you getting charged surrender fees and taxes, and your cash value used to fund the premium you stopped paying for.
3. Opting for reduced paid-up insurance.
This option comes with the fewest fees. A reduced paid-up option allows you to stop paying premiums in exchange for a lower death benefit.
The reduced benefit is based on the premiums you’ve already paid, and coverage lasts for life.
Even though the potential payout is much smaller, a reduced paid-up option doesn’t come with penalties and maintains some amount of insurance protection.
How To Cancel A Term Life Insurance Policy
There are a few ways to cancel a term life insurance policy. You can consider some of the options below:
1. Stop paying premiums.
If you miss a premium payment and don’t pay it within the grace period— the 30 to 31 days after your due date during which you still have coverage — your insurance is canceled.
2. Write a letter.
You can provide a written notice to your insurer that you’d like to cancel your life insurance policy.
However, some insurance companies’ policies detail in their contracts that issuing a stop-payment order for your premiums is considered written notice, but you can also write a very simple letter.
3. Call your insurance service provider.
Another easy way on how to can a life insurance policy is by reaching out to the insurance policy provider over the phone.
Through that, they will get informed about your decision and proceed further on the necessary process to cancel your policy.
Noteworthy, it’s interesting to note that compared to whole life insurance policy, cancelling term insurance policy results to no penalty or fee.
Another Way On How To Cancel A Life Insurance Policy
Selling your policy
Another option if you no longer need a whole life insurance policy is to sell it. But keep in mind that this process can be complicated. You will need to find a few reputable brokers who will purchase the policy from you, and then get offers from each of them.
The amount of money you can get from selling your whole life insurance policy varies, since the broker expects a commission for selling it.
But if you need cash, it may be a good option. Keep in mind that it can take a few months to sell a life insurance policy.
When to cancel your life insurance policy
There are a number of reasons why you might want to cancel your life insurance policy. Here are some of the most common situations when it could make sense to stop paying for it:
1. You no longer need coverage:
If your family is grown and your spouse or partner is able to manage on their own without a death benefit, it may be that life insurance does not need to be part of your financial portfolio any longer.
2. You are changing your investment strategy:
You may have realized that the investment options of your whole life policy are not as good as another financial vehicle for long-term savings. A financial advisor can help you determine if you would be better off with, say, an annuity or mutual fund.
If you have a whole life policy, cashing it in could give you a nest egg to invest in a higher-interest-bearing account.
3. You cannot afford the premiums:
If you are struggling to afford your life insurance premium, you may think about canceling your policy. Before you do, consider the options laid out above for those with financial struggles.
You may be able to keep the policy in force by using one of those strategies to lower the cost of life insurance to meet your other financial obligations.
A good thing to remember is that your life insurance policy should be part of a greater financial strategy that you have in place to provide a secure future for yourself and your loved ones.
If there are better ways to do that, it might make sense to cancel your policy and invest the money you would have paid in premiums into another savings vehicle.
When can you cancel a whole life insurance policy?
You can cancel a whole life insurance policy at any time, but you’ll face penalties if you cancel during the first 10 years of your coverage.
The penalty amount and how much of your cash value you keep depends on how long you’ve owned your whole life policy and the cash value amount you’ve accumulated.
Canceling during the surrender period
Some insurers won’t return any cash value amount if you surrender your policy during the surrender period. Most insurers also charge steep surrender fees during this time to recoup their expenses from selling and setting up the life insurance policy.
Canceling after the surrender period
After the surrender period, it’s more likely that you’ll keep some of your cash value earnings, but you could still pay surrender charges.
Insurers typically reduce the surrender fee once a year over the first decade the policy is active, meaning if your surrender penalty is equal to 10% of your annual premium in year one, it might be 9% in year two, down to 1% in year 10, and 0% after that. Surrender fees are listed in your policy contract.
Do you get money back when canceling life insurance?
The answer to this question is that it depends. If you have a term life insurance policy, which has no cash value component or investment option, the only possibility of getting money back is if you cancel in the middle of your payment cycle.
Then, you may receive a check for any premium that has not yet been applied to your account — which is going to be a very small amount compared to the policy’s death benefit.
If you have a permanent life policy, and you have equity built up in the policy because you have been paying into it for a decade or more, you may receive a lump sum payment from your insurer.
They will subtract any fees or outstanding loan balance out of this payment and send you the rest of the cash value of your policy. This, too, will probably be far less than your death benefit.
You lose your premium payments
It’s important to know what the consequences are for canceling life insurance. When it comes to your premium payments, it depends on the life insurance. In most cases your premium payments will be forfeited, and you will not receive anything for your previous payments.
The one exception to this is if you have whole life insurance and cancel it. You may have built up equity for all of the payments you have made so you may receive a lump sum payment from your insurer.
Keep in mind, if you cancel whole life insurance in the first 10 or 20 years, you may have to pay surrender fees, which can greatly reduce the lump sum you get from the insurance company.
Can your insurance company cancel your life insurance policy?
Your insurance company can only cancel your policy in very specific instances detailed in your policy contract.
Insurance regulations prevent insurance companies from canceling coverage except in cases involving:
Non-payment of premiums: If you don’t pay your premiums within the grace period, your policy is terminated.
Fraud: The insurance company can cancel your policy if you were intentionally dishonest on your application. This could apply even after the contestability period, when an insurer has the right to investigate your cause of death.
Your insurance company cannot cancel your policy for any other reason, including if you start smoking, pick up a dangerous hobby, or get sick.
One exception is that an employer can choose to cancel a group life insurance policy at its discretion. You also lose group coverage when you leave your company.
The steps for canceling your life insurance are straightforward, but the impact may not be. Before you end your coverage, find out what the potential penalties would be and confirm that your loved ones will still be protected.