How To Cancel a Life Insurance Policy & Why

Published May 23, 2024

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.

  1. 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.
  2. 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.
  3. 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:

  1. 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.
  2. 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.
  3. 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.

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.

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