If you find yourself needing to cancel your life insurance policy, it’s a relatively easy process. However, it’s important to evaluate your current scenario properly to ensure you are making the right decision. Let’s take a look at some things to consider before you decide to cancel your life insurance policy.
Reasons You May Need to Cancel Life Insurance
Cancelling a life insurance policy is a personal decision that must be made by the individual based on their unique needs. But, with that said, if you are struggling to decide whether to cancel your policy, here are a few of the most common reasons by consumers cancel their life insurance policies.
Your Budget Cannot Account For The Monthly Premium
Or, you’ve decided to allocate the monthly premiums into a different kind of investment. Either way, you may decide paying the premium of a life insurance policy simply isn’t worth it for you anymore.
Your Health Improved
You may have had a serious health issue that encouraged you to purchase a life insurance policy. But once you are no longer ill with that particular health issue, you might not need the insurance anymore.
You Simply Don’t Need Life Insurance Anymore
Maybe you paid off your mortgage, or any other debt that inspired you to purchase life insurance has been paid off.
You Found a Better Policy With Another Provider
It’s possible that another insurance provider offered you a better rate on a policy for a variety of reasons. For example, perhaps you stopped smoking cigarettes and became more appealing to another insurance provider.
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You no Longer Have Dependents
Many people buy life insurance to ensure their children are taken care of in the event of their death, especially if they are carrying a lot of debt. However, if your children have grown up and secured full-time jobs, you may not feel the same sense of obligation in having life insurance for your dependents.
When Can You Cancel Your Life Insurance?
Technically, there are no rules that dictate when you can and cannot cancel a life insurance policy. However, the time you choose to cancel your policy will be a factor in how much money you are able to get back.
The Free Look Period
The best time to cancel life insurance is immediately after you buy it. This time is referred to as the free-look period, also known as the cooling-off period. If you regret purchasing a policy, you might be able to cancel the policy without penalty if you do it right away. Usually, the free look period is 10-30 days after you purchase a policy. Cancelling during this time, you can usually receive a 100% refund on the premiums you’re already paid. However, it’s important to double-check your policy, as each one is different and may have a different free look period length.
It is possible to cancel your policy after the free look period, and it may be worth it for you to do so. Just ensure you are well informed about any financial penalties that come with cancelling your policy too late.
Return of Premium (ROP)
Another good time to cancel your policy is if you have a return of premium policy (ROP). Although this refund might not include any administrative fees, you can receive most of your monthly premium payments back. When purchasing a life insurance policy, you should check the contract to see if the provider offers an ROP to protect your money if you need to cancel the policy early.
Cancelling Term vs. Permanent Life Insurance
Cancelling Term Life Insurance
Term life insurance is a very common type of life insurance policy. Offering temporary coverage, term life insurance pays a one-time lump sum to your beneficiary when you die within the term of the policy. With low premiums, it is a popular type of life insurance policy. Cancelling term life insurance is straightforward. To do so, you can:
- Call your insurer;
- Write a letter to your insurer; or
- Fill out a cancellation form
It’s important to include your full name, contact information, policy information, and the date you want to cancel your coverage. Ensure your information is accurate to avoid any issues down the line, and cancel any automatic payments that you may have arranged with your bank. Finally, make sure to follow up with your insurer if you don’t hear back from them after a few days.
Want to switch your home insurance provider? Check out how you can cancel your home insurance.
Cancelling Permanent Life Insurance
Permanent life insurance, or whole life insurance, is a bit more tricky to cancel than term life insurance. However, it is still possible. Although the terms of cancellation will depend on a few factors, including how long you have had the policy, there are three general ways you can cancel your permanent life insurance policy.
Permanent life insurance policies have a cash surrender value. The surrender period applies to the first few years of your policy, during which cancellation of the policy results in fees and penalties. Keep in mind that while a life insurance death benefit isn’t taxable, any cash you obtain from cancelling your permanent policy is taxable.
Reduced Paid-up Option
Call your insurer to find out if a reduced paid-up option is available to you. This means you can stop paying your monthly payments while still keeping a reduced benefit (less money upon your death) on your policy.
Let it Lapse
Cancelling your policy can be as easy as simply ceasing to make monthly payments. If you stop paying your premium, many insurers will cash out your policy automatically. Other insurers will let your policy expire, after which you might be able to reinstate it. Although you will need to pay premiums in this case, it might cost less than purchasing a new policy altogether.
Cash Surrender Value and Permanent/Whole life insurance
As discussed above, there are permanent and term life insurance policies. Permanent policies allow you to invest cash every month, growing your investment over time. If you cancel this policy, you might be able to collect some of the cash that you invested, which is known as the cash surrender value (CSV). The amount of money that you would collect depends on how long you had the policy. If you cancel after a long time of having the policy, you will receive the cash surrender value, excluding any fees, charges or loans. However, if you cancel your policy too soon after taking it out, you may not have collected enough cash value to receive it back.
Alternatives to Cancelling Your Life Insurance
If cancelling your life insurance policy will cost too much money to be worth it, there are other options that you can consider.
Change Your Coverage
Perhaps you purchased a policy that covered every scenario you could think of. If you find the monthly premiums to be too high, it might be worth considering changing your coverage. Talk to your insurer to explore changing your coverage, as it could help lower your monthly premiums.
Get a Medical Check-Up
Life insurance policies are usually more expensive if you have health issues. However, if you overcome a health issue, it’s a good time to visit the doctor. Weight loss, cessation of smoking, or other drastic lifestyle changes could help you qualify for lower monthly premiums. Generally, you have to have had your policy for at least a year before exploring this option.
If you have held your life insurance policy for many years, you might be able to sell your policy to someone else. This can help you at least recover the cash value of your policy. Talk to your insurer to ensure there are no provincial or company sale restrictions, fees, or tax implications.
Cover Your Premiums With Your Cash Value
If you have invested a significant amount of money into your life insurance policy, you may be able to cover your monthly premiums with the cash value. Reach out to your policy provider to explore paying your premiums with the cash value of the policy.
Life Insurance FAQs
Can my life insurance provider cancel my policy?
- You haven’t made any premium payments with your grace period
- You committed fraud or lied on your application.
What happens if I don’t pay my premiums?
Can I convert my term life insurance to a permanent policy?
Cancelling your life insurance policy is a decision that shouldn’t be made lightly. It’s important to evaluate all of your options before deciding how to proceed in cancelling your policy.