Life insurance provides financial protection for people and their loved ones, should the unexpected happen. But as time passes, it may not be the most beneficial choice for everyone, whether it’s because of high premiums or other financial conflicts.
There are many reasons why someone would want to cancel their current life insurance, including:
- A more limited budget that can no longer cover payments
- No beneficiaries or future financial obligations
- A better insurance policy that promises more benefits
- A switch from a life insurance policy to an annuity settlement
So, what options are available for those who seek solutions? Can you cancel life insurance—and if so, why should you do it?
Can You Cancel a Life Insurance Policy?
Yes, you can cancel a life insurance policy. Depending on each person’s situation, however, the process can look a little different. For instance, some people have a term life insurance policy, which promises coverage for a set amount of years. A whole life insurance policy, which is significantly more expensive, has no expiration date. Canceling a term life insurance policy is easier and less costly than canceling a whole life insurance policy, which can come with extra cancellation fees.
Should You Cancel Your Life Insurance Policy?
Canceling a life insurance policy can be a difficult decision and may not be the right choice for everyone. There are several reasons why a person might ask themselves, “Should I cancel my life insurance?” The policyowner may no longer be able to afford monthly premiums, is no longer satisfied with their plan, or simply doesn’t feel the need for insurance any longer.
For some, selling a life insurance policy is a viable alternative, as people can get cash and earn up to four times more than they would by surrendering their policy.
When to Cancel a Life Insurance Policy
Here are some reasons someone might consider canceling a life insurance policy:
- Financial Stability: If the policyholder’s financial situation has significantly improved, and they no longer require the coverage to protect dependents or cover debts.
- Dependents Are Financially Independent: When children or other dependents become self-sufficient and no longer rely on the policyholder’s income for support.
- Better Coverage Elsewhere: Finding a more suitable or cost-effective life insurance policy with better benefits or lower premiums from another provider.
- Health Improvement: If the policyholder’s health has improved since purchasing the policy, they may qualify for better rates on a new policy, making the current one unnecessary.
- Change in Family Circumstances: Significant life events such as divorce, marriage, or the death of a beneficiary may necessitate a reassessment of life insurance needs.
It’s crucial for individuals to carefully evaluate their specific circumstances and consult with financial advisors or insurance professionals before canceling a life insurance policy to ensure they’re making the best decision for their financial future.
What Are the steps for Canceling Life Insurance?
Depending on the provider and type of life insurance, the cancellation process can vary. You should follow the steps below when figuring out how to cancel life insurance.
How to Cancel During the Free Look Period
In order to cancel a life insurance policy without any penalties or additional costs, you must do so within a free look period, which only applies to new policies. Depending on the insurer and your geographic location, a free look period ranges from 10 to 30 days from the time you sign the policy. If you call or write to your insurance company within this allotted time, you can cancel your insurance without any penalties and receive a full refund for any premiums you’ve already paid.
How to Cancel Term Life Insurance
One common question people ask is, “Can you cancel term life insurance?” Canceling a term life policy is a fairly straightforward process. However, you won’t be able to receive any monetary return. If you’d like to earn money from your policy, consider cashing in your life insurance policy.
If you opt to cancel a term life policy, there are a few concrete steps you need to take.
- Connect with your insurance company. Get in touch with your agent to receive clear-cut directions on how to cancel your term life insurance policy. They should be able to help you get started.
- Stop making monthly payments. Access your online account and remove your payment information. If you make your payments in-person or via physical mail, you can simply skip your future payments.
- Write, call, or complete an online form. Doing so will help you proceed with your cancellation request, whether it’s through verbal or written confirmation.
If you realize that you want to keep your insurance policy after cancellation, you can take advantage of a grace period of 31 days where you can make up your missed payments. However, once the grace period passes, you will lose your coverage.
How to Cancel Whole Life Insurance
Due to the investment value of a whole life insurance policy, canceling whole life insurance is a bit more complex than canceling term life insurance. Alternatively, similar to cashing in term life insurance, you can exchange your whole life policy for a life settlement.
You also have the following options:
- Contact your insurance company, then cash out and surrender your policy. Cash value is the interest that you earn through your policy. Your whole life insurance comes with a surrender value, which is your cash value after fees and penalties. A few factors will determine the amount of money you receive after surrender, such as the length of your coverage period and your insurance company’s rules. Keep in mind that there are surrender periods; whether you cash out your policy before or after a surrender period can also affect your penalties.
- Stop making payments and allow your insurance to lapse. Although it varies by insurance company, some insurers will naturally let your policy lapse. If you have universal life insurance, which is another type of insurance with no expiration date, keep in mind that the company will use your cash value (the interest that you earned through your policy) to pay your premiums. This decreases any amount you get back after letting your policy lapse.
- Consider a reduced paid-up option. If you want to minimize fees and penalties, this may be the most optimal solution. With a reduced paid-up option, you no longer have to pay premiums, but will receive a decreased death benefit. If you’re struggling to pay your premiums for your whole life insurance policy, switching over to a reduced paid-up option can help alleviate some of your financial burdens.
Can Your Life Insurance Company Cancel Your Policy?
Your life insurance company has the ability to cancel your policy, but only under certain circumstances. The biggest reason a company would cancel your life insurance is if you do not adhere to the agreements of your policy. For instance, if you don’t make timely payments, and your grace period passes, they will automatically cease your coverage. The second major reason a company would cancel your policy is if they discover that you provided fraudulent information, and it’s within the first two years of your policy. Even after those first two years, which is the contestability period, the company can still investigate and refuse to provide money for your beneficiaries if they find you falsified some information.
In general, aside from these two major reasons, a life insurance company cannot cancel your policy.
Do You Get Money Back After Canceling Life Insurance Policies?
Whether you get money back after canceling a life insurance policy depends on the type of policy you have and its specific terms. Here are the typical scenarios:
- Term Life Insurance: Generally, you do not receive money back when canceling a term life insurance policy. Term life insurance provides coverage for a specific period, and if you cancel the policy before the term ends, you typically won’t receive any refunds.
- Whole Life Insurance: With whole life insurance, you may be entitled to receive a cash surrender value if you cancel the policy. Whole life policies accumulate cash value over time, and this value can be accessed if the policy is canceled. However, the amount you receive may be subject to surrender fees and taxes.
- Universal Life Insurance: Similar to whole life insurance, universal life policies can accumulate cash value. If you cancel a universal life policy, you may receive the cash surrender value, subject to any surrender fees and taxes.
It’s essential to review your policy documents or contact your insurance provider to understand the specific terms and any potential financial implications of canceling your life insurance policy.
Common Reasons to Cancel a Life Insurance Policy
Life insurance is a valuable tool for protecting loved ones and supporting long-term financial goals, but it isn’t always meant to last forever. As your circumstances evolve, the original purpose of your coverage may no longer apply. Whether you’re entering a new life stage, adjusting to major financial changes, or reevaluating legacy planning, it’s worth reviewing whether your policy still aligns with your needs. Below are ten common reasons policyholders consider canceling life insurance coverage—and the key factors to weigh before making a decision that affects your financial future.
1. You Can No Longer Afford Coverage
Life insurance premiums can feel like a manageable expense at first, but financial hardships can make those same payments difficult to keep up with over time. Whether you’re facing job loss, increased cost of living, or other budgetary pressures, maintaining your policy may start to feel like a financial strain. In these cases, canceling the policy may seem like the simplest solution, and for many, financial hardship is a compelling reason to cancel a life insurance policy. You may be able to switch to a more affordable term life policy, reduce your coverage amount, or consider options like selling your policy through a life settlement if you no longer need the coverage.
2. You Have Paid Off Your Debts
One of the primary reasons people purchase life insurance is to help loved ones cover debts after they pass away. If you’ve ever paid off your mortgage, eliminated student loans, or cleared your credit card balances, your original coverage goals may no longer be relevant. Without those financial obligations, the need for a large life insurance policy may diminish. Before canceling, think about whether other financial responsibilities, like final expenses or legacy goals, remain a priority. If not, letting go of your policy could free up funds for other needs.
3. No Beneficiaries or Future Financial Obligations
Life insurance is designed to support the people who rely on you financially. But if you no longer have dependents or anyone counting on your income, the purpose of your policy may be less clear. For example, if you’re a single, child-free individual or your children are now fully self-sufficient adults, maintaining coverage might not offer meaningful value. If your estate is straightforward and your assets are sufficient to handle any taxes or final expenses, the policy may no longer play a critical role in your financial plan. In these situations, canceling your life insurance could make sense.
4. You Want to Reduce Your Life Insurance Coverage
Life isn’t static, and your life insurance needs aren’t either. As you grow older, pay off debts, or shift financial priorities, the amount of coverage you originally purchased may no longer align with your current circumstances. Rather than canceling your policy outright, you might explore options to scale down. For example, you could reduce your death benefit amount or switch to a simpler term policy. These adjustments can help lower your premium payments while still maintaining a level of financial protection for your beneficiaries.
5. Going Through a Divorce
Divorce often requires a complete reevaluation of your financial responsibilities, which may prompt some individuals to cancel life insurance coverage that no longer aligns with their new circumstances. If your ex-spouse was the primary beneficiary or your shared financial obligations have ended, you may decide the policy is no longer necessary. It’s important to review and update beneficiaries and consider how your life insurance fits into your post-divorce financial plan.
6. You Inherited Money
A significant inheritance can shift your financial outlook in a major way. If you now have enough assets to comfortably support your loved ones, fund your retirements, and handle estate costs, your life insurance policy may no longer be necessary. That said, it’s important to consider whether your policy provides any additional benefits, such as tax advantages, liquidity at death, or estate equalization strategies, before deciding to cancel. In some cases, a policy may still serve a useful purpose, even when your overall financial picture has improved.
7. Loss of Dependents
If the individuals you originally intended to protect with your policy are no longer financially dependent on you, your need for life insurance may decrease. For instance, if your children have grown up and become financially independent—or if you’ve experienced the loss of a spouse or other dependent—the policy’s value might be diminished. Without someone relying on your income or financial support, the death benefit may no longer serve its intended purpose, making this a valid reason to cancel a life insurance policy for many policyholders. Reassessing your coverage during these life transitions can help ensure your financial plan reflects your current reality.
8. Going Through Retirement
As you enter retirement, your income changes—but so might your insurance needs. Life insurance is often used to replace income for surviving family members, but once you stop working and start drawing from pensions, Social Security, or retirement savings, that objective may no longer apply. If your spouse or loved ones are financially secure, the need for continued coverage might diminish. Some retirees choose to cancel their policies to reduce expenses or unlock the cash value in a permanent policy, while others consider a life settlement as a way to receive value from a policy they no longer need.
9. You Found a Better Deal
Just like with other financial products, life insurance policies vary significantly between providers. If you’ve found another policy that offers lower premiums, better terms, or features more aligned with your current needs, you might be tempted to switch. Before making any changes, it’s important to compare the full picture—underwriting requirements, benefit amounts, and policy flexibility. Also, make sure your new policy is active before canceling the old one to avoid any lapses in coverage. In some cases, selling your old policy may even be a better financial move than canceling it outright.
10. Your Employment Changes
Job changes often come with shifts in benefits, including life insurance. If your new role includes employer-provided life insurance with sufficient coverage, you might consider scaling back or even choosing to cancel life insurance policy coverage if it’s no longer necessary. However, employer coverage is often limited in amount and not always portable if you change jobs again. It’s important to evaluate whether your workplace policy truly meets your long-term needs. If it does, canceling your individual policy could help reduce costs. If not, maintaining supplemental coverage might still be a smart move.
Are There Alternatives for Canceling a Life Insurance Policy?
If you still have dependents or unprotected beneficiaries, or if there’s a possibility of you needing a policy in the future, cancelation may not be an ideal solution. Fortunately, there are several other alternatives to canceling life insurance—each with its own benefits and risks.
- Check if you can lower your coverage or convert to a different plan. Most companies will allow you to lower your coverage or choose another available plan with a decreased death benefit. When you get in touch with your insurer, they’ll let you know your options.
- Consider a tax-free 1035 exchange. This allows you to carry your existing insurance funds into a new policy, or even a different type of settlement like an annuity. You do not have to pay additional taxes when making the transition.
- Pause payments, but keep your coverage. If you have universal life insurance, you can halt your premiums while still maintaining your coverage. Meanwhile, your premiums will be paid out of the accrued cash value. For other types of insurance, you may still be able to keep your policy without having to contribute for a period of time. It’s best to contact your insurer so they can provide you with relevant information surrounding your specific case.
- Sell your life insurance policy in exchange for some cash. You can exchange your policy for a life settlement, which is a cash payout from a third-party buyer. Although you’ll receive less than the total value of your insurance, you may still be able to earn more than your surrender value. Determine if you are eligible to sell your policy.
In Conclusion
Selling your life insurance policy doesn’t have to be complicated or worrisome. If you’re deciding which path to take with your current insurance and are unsure of your best options, Coventry can help.
To learn more about selling your life insurance policy, get in touch with us and find out if you qualify today.
