How to Cancel A Life Insurance Policy – A Step-by-Step Guide

Published December 26, 2023

Life insurance can provide an immense amount of protection for your loved ones when they need it most. However, there may come a time when you no longer want, need, or can afford your policy. When it comes to canceling life insurance, there are several factors to consider: your policy type, the amount in your cash value account, your policy’s coverage terms, and any potential penalties for canceling. Before terminating your life insurance coverage, learn more about how to cancel your policy and what your alternative options are to get the maximum value out of your policy. Let’s begin!

Understanding the Life Insurance Policy Cancellation Process

There are a couple of ways you may be thinking about ending your life insurance coverage: by not paying premiums anymore or notifying the life insurance carrier that you no longer want the policy. Before you take any of these actions, it’s important to understand the ramifications of each of these steps.

When You’re Still in the “Free Look” Period

When you purchase a life insurance policy, you typically have a “free look” period that allows you to cancel the policy within a certain time period with no penalties. Typically, a free look period lasts anywhere from 10 to 30 days. If you decide to proceed with the cancellation of your life insurance policy within this window, you can typically receive a full refund of your premium without any surrender charges.

When You Stop Paying Life Insurance Premiums

If you’ve owned your policy for a while and you are not in the “free look” period, your policy typically enters a grace period when you stop paying your life insurance premiums. The grace period on life insurance policies typically lasts for 30 to 60 days after the premium due date. During this time, you can catch up on missed payments without any penalties. However, once the grace period ends, your policy will end, and you will no longer have coverage.

For term life insurance policies, if you haven’t made a payment by the end of the grace period, the policy will lapse, and your beneficiaries will no longer receive the death benefit of the policy should you unexpectedly pass.

On the other hand, missed premium payments for permanent life insurance policies are slightly more complex. If payment is still outstanding at the end of the grace period, your insurer can draw money from your policy’s cash value account to pay for the missed premiums. The insurance company will continue to cover the premiums until the account is depleted. Your policy remains in force until the cash value account can no longer cover your premium payments. That means that when an insurance company draws cash from your cash value account to pay for premiums, your cash surrender value decreases.

When You Request to End Coverage With Your Insurance Company

If you don’t want your life insurance provider to use the cash value account to pay for premiums, you can notify them that you’re interested in surrendering the policy. Surrendering your life insurance policy allows you to collect the cash surrender value, which is the cash you’ve accrued in your cash value account minus any penalties and fees.

Term policies do not offer cash surrender value, so you can simply lapse your policy by notifying your insurance company or by ending premium payments.

While it’s not a requirement by law, some insurance companies may offer policy reinstatement if the coverage has lapsed due to unpaid premiums. This typically involves paying any overdue payments, but whether your reinstatement request is granted is solely at the discretion of the insurance provider.

Steps for Canceling A Life Insurance Policy

When you’re sure that you want to cancel your life insurance policy, there are a few steps you need to take, depending on your policy type.

How to Cancel a Term Policy

It’s extremely easy to cancel a term life insurance policy: simply stop making premium payments.

Since there’s no cash value account, you cannot surrender a term life insurance policy for cash, so the easiest way to end your policy is by not paying premiums anymore.

However, before you cancel a term policy, you may want to find out if you can sell the policy in a life settlement for cash. Even though term policies do not have cash surrender value, they may have cash value if you qualify for a life settlement. In a life settlement, you can sell your life insurance policy to a third-party buyer for a lump-sum cash payment. Learn how to sell your life insurance in a life settlement here.

How to Surrender a Permanent (Whole Life or Universal Life) Policy

When you cancel a permanent life insurance policy, you’re really surrendering it for the cash value that it holds (if any). Surrendering your policy means that you will receive the cash surrender value — if any exists — and that your beneficiaries will no longer receive the death benefit when you die.

Similar to term policies, permanent policies may be worth more if you sell it to a third-party buyer instead of surrendering it. The average life settlement payout is four times the surrender value of a policy, so it may be worth your time to find out if you qualify for a life settlement.

No matter what route you decide to take, it’s important to understand the steps it takes to cancel a life insurance policy.

Here’s what the cancellation of a life insurance policy looks like:

  1. Contact your insurance company. Reach out by phone or email, and your insurance company will provide you with instructions on how to proceed. Be sure to have your policy number and personal information on hand when contacting them. They may also share life insurance policy cancellation rules with you to ensure you understand what ending life insurance coverage entails.
  2. Provide required information and documentation. Your life insurance carrier will likely ask your reason for canceling the policy, the effective date of the cancellation, and any other pertinent details. Depending on your policy obligations, you may need to fill out a cancellation form and provide a formal written request for cancellation.
  3. Pay any outstanding premiums, loans, or fees. Confirm with your insurance company whether there are any outstanding premiums, loans, or fees that need to be paid before canceling your policy. It’s important to settle any outstanding payments to avoid any complications in the cancellation process.
  4. Confirm policy cancellation. After submitting your cancellation request and any required documentation, you should receive confirmation of your policy cancellation from your insurance company. Keep this confirmation for your records.
  5. Receive your cash surrender value payout. Life insurance companies typically pay the cash surrender value within 30 days of canceling your policy. However, it may take longer depending on any complications, such as outstanding loans, missing premium payments, etc.

When to Cancel A Life Insurance Policy

Making the decision to cancel a life insurance policy is not a decision that’s made lightly. There are several reasons why people decide they no longer need or want life insurance coverage. If you’re not sure whether you should move forward with life insurance policy cancellation, here are the most common reasons people decide they no longer want life insurance coverage.

  • They simply do not need the coverage. Circumstances change as people grow older. A common reason why someone may no longer need the coverage is if their dependents are no longer financially dependent on the insured’s death benefit to survive or their beneficiaries are no longer living.
  • They can’t afford the premiums. Another major reason people decide to cancel their life insurance policy is if they can no longer afford the premiums. Whether they’ve experienced an unexpected cost of insurance (COI) increase or they’ve experienced a change in their personal financial situation, many people often find themselves unable to afford continued coverage.
  • They’d like to make a change in investments. Sometimes policyowners cancel their life insurance policy because they have found a better investment opportunity elsewhere.
  • They want cash now. Finally, a policyowner may want the liquidity of their life insurance now rather than the death benefit later. They could use the cash from their policy for living expenses, long-term retirement costs, healthcare bills, and more.

What Happens After You Cancel Your Life Insurance Policy?

After you cancel your life insurance policy, you no longer have coverage, and your beneficiaries will not receive the death benefit of the policy in the event of your death. If available, your life insurance carrier will send you a check for your cash surrender value, which is the money in your cash value account minus any fees or charges.

Alternatives to Cancelling a Life Insurance Policy

Besides outright canceling your life insurance policy, there are several other options you may want to consider.

Adjust Your Policy

Depending on the type of policy you have, you may be able to adjust it to better fit your needs. For example, you may be able to lower your coverage amount, adjust your premium payment schedule, or even convert it into a different type of policy altogether. Explore how your life insurance carrier can work with you to make the policy a better fit for your life circumstances.

Tax-Free Exchange

In a tax-free exchange, you can exchange your life insurance policy for another without paying taxes. Also known as a 1035 exchange, this allows you to trade in your policy for one with lower premiums or better features.

Use Cash Value to Pay Premiums

If you have a permanent life insurance policy with cash value, you may be able to use the cash value to pay your premiums and maintain coverage. This can help you keep your policy in force without having to pay additional money out of pocket for premiums.

Sell Your Policy

Another way to get rid of your premium payments while extracting as much value from your life insurance policy as possible is by selling it to a third-party buyer in a life settlement transaction. In a life settlement, you sell your policy to a life settlement provider for a cash payout, and they take over ownership–and premium obligations–of your policy. Upon the insured’s death, the life settlement provider collects the death benefit. One of the main benefits of selling a policy in a life settlement is the cash payout: a life settlement payout is, on average, four times the cash surrender value of a policy. Interested in finding out if your policy qualifies for a life settlement? Learn how to sell your life insurance policy here.

The Bottom Line

As you evaluate whether to cancel your life insurance policy, remember that you have options beyond lapsing and surrendering your policy. Selling your policy in a life settlement can be a lucrative way to offload premium payments while receiving a lump sum cash payout for your policy. For more information about cashing out life insurance, contact Coventry Direct today.

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