Canceling Your Life Insurance: A Quick Guide

Last Updated on December 11, 2024

Are you considering canceling your life insurance policy? Although it can be a tough decision, it is important to understand the implications before abiding by it. When canceling your policy, you will no longer have coverage and protection for yourself or your family if something happens to you.

We’ve put together this quick guide for you to easily navigate the process of canceling your life insurance policy if you decide to do so. Make sure you carefully explore them when considering what steps to take next! Also, spend lots of time on making a decision as to if it’s a wise decision or not, to cancel your policy.  Doing something like this should never be a ‘knee jerk’ reaction.

Can I Cancel My Life Insurance Anytime?

The simple answer is yes—you can cancel your life insurance policy anytime. However, it is always worth double-checking to ensure there are no pesky exceptions.  Once you complete the cancelation forms, or if the policy lapses from non payment of premiums, the life insurance coverage goes away.  Any riders or additional benefits provided would also be forfeited.

For instance, if you have an indexed universal life insurance policy, you might be required to pay surrender charges or fees if and when you decide to cancel in the first ten years. The percentage usually ranges from 5% to 10% of the policy’s cash value—so be sure to factor that into your decision if this applies to you.

Or if you have a whole life insurance policy, there would not be any surrender fees to receive the cash value.  In the event you have a term life insurance policy, and wish to cancel it, there is no cash value tied to these types of policies.  Thus a person can always choose to cancel their policy without facing any penalties or fees.

How Can I Cancel My Life Insurance Policy?

Canceling your life insurance policy can be intimidating—but it doesn’t have to be. In the USA, you have a free look period after purchasing the policy that lasts for 30 days on average.  If for whatever reason you do not want to proceed with the policy, you would receive a refund of any premiums paid during this free look period.

In the event you wish to cancel your policy during a later time frame, you could absolutely do so.  One of the great benefits with life insurance is how you can always get rid of a policy if it’s no longer beneficial to you and your family.

The steps of completing this process may vary depending on the type of policy, and from the insurance company you bought from. Still, regardless of the specifics, resources are available to help you navigate them efficiently and effectively.

For most people, you could contact the life insurance company customer service department, and ask them to send out a cancellation form.  Upon completing this service form, and sending it back to them for processing, the insurance company would cancel the policy.  Now, if you have a form of cash value based life insurance, the amount you would receive back may be a taxable event.  It would be wise to speak with your accounting professional before making any final decisions.

Term Life Insurance

Term life insurance is set up to provide coverage for a fixed period, such as 10, 20 or 30 years. This type of insurance often has cheaper premiums, a straightforward death benefit, and no investment vehicles inside the policy.  Try to picture these policies as a way to protect your family for a defined time period.

Canceling such term-life policies can be done at any time you choose; however, it’s important to proceed with caution and due diligence. Before canceling, make sure all the outstanding payments on the policy have been confirmed as paid and updated in the records.

It would also be wise to read over your policy’s conditions to check for any possible penalties or fees associated with cancellation.  It’s very rare that there would be any penalty for canceling a term policy, but we can’t speak for every life insurance provider. The easiest way to cancel is usually contacting an adviser from wherever you obtained the policy, as they should be able to help with any details you’re unsure about and point you towards other options.

Whole Life Insurance

Whole Life Insurance is a lifetime policy that provides coverage for as long as you live. Unlike term life insurance policies, whole life plans have an investment component inside the policy which can be used to fund retirement or pay off the debt in addition to the death benefit.   We refer to this as the cash value portion of the whole life insurance policy.

Canceling this type of policy requires first identifying its surrender value or cash value which is the entire amount of money that can be received from the policy on termination (or surrender). This amount depends on factors such as time elapsed and premium payments made. Additionally, you may have to pay a surrender fee for cancellation.

If possible, it’s always worth checking with your insurer to see if there are any other options available that could offer better value than surrendering the insurance policy.

Other Different Options For Whole Life Insurance Policy

If you want to keep some of the benefits of your whole life insurance policy but don’t need it anymore, there are other options. Based on the type of policy you have, you can convert it into a term life insurance policy or a cash value policy.

Or if there’s significant cash value available, you could consider a reduced paid up policy.  This means that the death benefit would be reduced, but you’d then have a policy that no longer requires any future premiums.

Tax-Free Exchange

A tax-free exchange, also known as a 1035 exchange, can be a great way to upgrade your life insurance policy without getting hit by taxes.

With this kind of exchange, you surrender your old policy and replace it with another one, but instead of cashing out the money you make from canceling the first policy, you have the option to roll over the value of that policy into the new one. This strategy lets you avoid having to pay income tax on the amount made from canceling your old policy.

Another possible solution for your cash value is to do a 1035 tax free exchange into some type of an annuity.  If you elected this option, there would be no taxable event, and the annuity would continue tax free accumulation.

Sell Your Policy

Selling a whole life insurance policy can be a great option if you are in need of cash, but the process is not always straightforward and can be complicated.

To start, find reputable brokers that are willing to buy the policy from you and receive offers from each of them. Though the money received will vary due to brokerage commissions, it may be beneficial if you’re in need of cash.

It’s important to remember that selling a life insurance policy generally takes a few months because it involves a considerable amount of paperwork and negotiations. So if you need cash fast, this may not be your best option.

When Should I Cancel My Policy?

Canceling a life insurance policy is a decision that should be made based on your specific circumstances. It can make sense if you’re no longer in need of coverage, are no longer able to afford the premiums, or have decided to switch to another type of policy.

In any case, it pays to do your research and consider the possible outcomes before you make a final decision. Here are some of the most common cases where it might make sense to terminate your policy:

• Your premiums become too expensive to pay

The decision to terminate your life insurance policy is something you should think carefully about since it can have long-term repercussions. If you’re feeling the pinch of those premiums and need some financial breathing room, consider looking into ways to lower the cost.

You can talk to your life insurance provider or an independent agent to see if there are any solutions that fit your budget. Consider all your options after weighing the pros and cons of each and make an educated decision.

For those living with Diabetes, there’s a good chance that your health may have improved since you established a policy.  You can always re-apply and see if there are better life insurance rates available.  There’s no rule stating that you cannot replace one policy with a better one.  This is a strategy that we frequently utilize for our clientele.

• You no longer need life insurance

Deciding to cancel your policy can be challenging because life insurance is intended to protect the most important people in your life. But if you and your family no longer need coverage, it may be time to look into canceling your policy.

When you don’t have dependents reliant on a life insurance benefit, you’re free to reassess whether or not the cost of a policy is worth it for you at this point.  Perhaps you no longer have a mortgage, and your kids are financially stable.  In situations like this, you might not need to own a life insurance policy.

• You are changing your investment strategy

When it comes to managing your investments, every situation is unique. While a whole-life policy might have seemed like a good option at one point, you may have recently decided that it’s not the best fit for you.

If this is the case, consider canceling your policy and investing the accumulated funds into higher-interest alternatives, such as an annuity or a mutual fund.

A good financial advisor could help you make an informed decision on what will yield the best long-term returns for your situation.  As your life changes, so do the types of financial instruments you should own.

What To Know Before I Cancel My Policy?

Canceling an insurance policy can be tricky if you aren’t aware of the details and steps to ensure that you meet all the requirements. Before you opt to cancel your life insurance coverage, it’s important to understand the tax implications.

In most cases, surrendering a cash value policy will result in taxable income. Depending on how long you have had the policy, you may also be subject to surrender fees or penalties for canceling the contract early.

Before canceling your life insurance policy, here are other things you need to remember.

• What will happen to my money after I cancel my policy?

You won’t be penalized if you’ve decided to cancel your life insurance policy. The insurance provider will send you a check for your policy’s cash value within 30 days of cancellation. The amount will be based on what you have paid into the policy minus any applicable fees. However,  if it’s a term policy, there will likely be little of a return.

• Can I get my money back once I cancel?

When it comes to life insurance policies, expect a different return on your investment. After all, they also have to cover administrative fees and costs associated with canceling the policy. Whether or not you get money back when canceling is determined by the type of policy you have.

Term life insurance has no cash value, so if you cancel in the middle of your payment cycle, you might be eligible for a refund which will be lesser than the death benefit of the policy. For those who elected a return of premium rider on their term policy, you may be able to receive back a portion of the premiums you’ve paid in.

On the other hand, if you have an insurance policy with a cash value account and investment option, you may receive the current value of the cash value after cancellation.  It would not technically be all your money back, rather it’s the surrender value of your life insurance policy.

• Will there be a refund?

Getting a refund on your life insurance premium payments depends on the life insurance policy you have. If you’ve got a term life insurance policy, you would not receive any funds back unless it’s a return of premium policy.

On the other hand, if you have permanent life insurance coverage, such as whole or universal life insurance, you may actually get something back when you cancel your policy— namely, the premiums you have put into the policy minus any fees associated with canceling it. Of course, this depends on how long you have had the policy and how much cash value has accrued.  You can easily contact your insurance company and ask the value of your contract.

Stay Informed To Cancel Without The Hassle

Every situation is unique, so it is essential to consider all of these potential scenarios before deciding whether or not to cancel or surrender your life insurance policy. You can talk to an experienced professional who can help assist you through the process and ensure you understand your decision’s implications.

The time it takes to cancel a life insurance policy will vary from insurance company to company.  If there’s a cash value tied to the policy, it may take anywhere from fifteen to 30 days to receive the proceeds.

All this to say: before you cancel, be sure that you understand what happens to your money––because knowing the ins and outs of these policies can pay off!