Whole Life Insurance: Canceling Policy Penalties Explained

Whole life insurance is a type of permanent life insurance that lasts for the rest of your life and usually includes a cash value account. The process of cancelling a whole life insurance policy can be more complex than cancelling a term policy due to the additional elements involved. Cancelling a whole life insurance policy is a significant decision that can arise due to various reasons such as a change in financial situation or securing a better policy.

When cancelling a whole life insurance policy, it is important to be aware of the potential penalties and fees involved. Cancelling during the free look period, which typically lasts 10 to 30 days, allows policyholders to cancel without any financial penalty and receive a full refund of premiums paid. However, cancelling after this period may result in surrender fees and other charges. These fees vary depending on the insurance company and the length of time the policy has been held.

In addition to surrender fees, there may be other deductions from the cash payout upon cancellation, including administrative fees, outstanding loans, and taxes. It is crucial to carefully review the life insurance policy and understand the specific rules and conditions before making a decision.

Cancelling a whole life insurance policy will not cost you an out-of-pocket fee

First, there are the inherent losses. Some required fees will be subtracted from your payout, so you will not get back all the money you paid into the policy. These fees include administrative fees, surrender fees, outstanding loans, and taxes.

Second, there is the opportunity cost of not investing your money elsewhere. Whole life insurance policies are notorious for their low returns, especially in the first few years. If you had invested your money in a different financial vehicle, you might have seen higher returns.

Finally, there is the time and hassle cost of cancelling your policy. You will need to call your insurance company and follow their specific cancellation rules. You may also need to consult a tax professional to understand how taxes will affect your situation.

If you are considering cancelling your whole life insurance policy, it is important to weigh these costs against the benefits of cancellation.

You may get some money back when you cancel a whole life insurance policy

Cancelling a whole life insurance policy will not cost you an out-of-pocket fee, and you may even get some money back. However, there are some required fees that will be subtracted from your payout, so you will not get back all of the money you paid into the policy.

Whole life insurance policies have something called a cash surrender value. This is the actual amount of money you receive back. Your policy's cash surrender value is its cash value minus any administrative or additional fees. While you will not receive a bill for cancelling your policy, you can expect some money to be subtracted from your final payout. Here are some of the factors that may deduct from your final payout:

• Surrender Period: This is a predetermined amount of time in the first few years of owning a policy where cancelling incurs a surrender fee. Every policy is different, but a surrender period can sometimes be up to the first ten years of ownership, and some surrender periods stipulate that if you cancel within the first couple of years, you will receive no money back at all. Usually, a surrender fee is just a percentage of the annual premium, and that percentage decreases the longer you have had the policy.
• Administrative Fees: Insurance companies will always subtract some of the amount to account for them holding the policy, as well as services rendered.
• Outstanding Loans: Cash value policies have the benefit of being able to withdraw loans against their balance. If you have a loan out against your cash value when you cancel your policy, that amount will be subtracted from your cash surrender value.
• Taxes: Whole life insurance policies are what is known as tax-deferred, meaning you will not need to pay taxes on them until you actually receive the cash surrender value. Once you have received the amount, it will be taxed as income.

If you cancel your policy during the cooling-off, or grace, period, which is usually around 30 days, you can get a refund of the premiums you would've paid so far.

Surrender fees and other charges will be deducted from your final payout

When you surrender a whole life insurance policy, you will receive the cash value of the policy, but there are a number of deductions that will be taken from this final payout. These deductions include surrender fees, administrative fees, outstanding loans, and taxes.

Surrender Fees

Surrender fees are incurred when you cancel your coverage early. These fees can be high in the early years of the policy and then gradually decrease over time. Surrender fees typically range from 10-35% and are usually a percentage of the annual premium. Some policies may have a surrender period of up to the first ten years of ownership, during which cancelling the policy will result in a fee. In some cases, if you cancel within the first couple of years, you may not receive any money back at all. It is important to review the surrender fees and waiting period specified in your policy documents before making a decision to cancel.

Administrative Fees

Insurance companies will typically subtract a portion of the payout to account for administrative costs associated with holding the policy and providing services. These fees can vary depending on the insurance company and the specific policy.

Outstanding Loans

If you have taken out any loans against the cash value of your policy, the outstanding loan balance, including any accrued interest, will be deducted from your final payout.

Taxes

Whole life insurance policies are tax-deferred, which means you will not pay taxes on the cash value until you receive the payout. Once you receive the payout, it will be taxed as income. The amount of taxes you pay will depend on your income bracket. It is important to consult with a tax professional to understand the tax implications before surrendering your policy.

Cancelling a whole life insurance policy is completely normal

In most cases, cancelling your policy will not cost you a fee. However, you may have to pay some required fees, and you will not get back all of the money you paid into the policy.

If you cancel a whole life insurance policy, you will get money back. However, you will not get the entire cash value back when you cancel a policy, as some fees will be deducted. These fees include administrative fees, outstanding loans, and taxes.

If you have recently purchased a policy, you are likely within the "free look" period, which typically lasts 10 to 30 days. During this time, you can cancel your policy without any financial penalty and receive a full refund of any premiums you've paid.

If you have had your policy for a long time, it may be worth keeping it. Whole life insurance has low returns when held for decades, but the returns are even worse if the policy is only held for a few years.

You can sell your life insurance policy instead of cancelling it

A life settlement allows you to sell your life insurance policy to a third party. The third party will pay you a lump sum, and then they become responsible for paying the premiums and will receive the death benefit when you pass away.

The amount you receive from a life settlement is typically between 10% and 25% of your policy's death benefit. If you have a terminal illness, you could receive a viatical settlement, which is a similar arrangement but with a higher payout.

You can enlist a broker to help you find a buyer, or you can go directly to a life settlement company. If you use a broker, they will take a cut of the money you receive.

Before you sell your life insurance policy, make sure you explore all your options. For example, you could reduce your coverage level to make your premiums more affordable, or you could take out a loan from your life insurance policy.

If you decide to sell your life insurance policy, be sure to shop around for the best deal and only work with reputable brokers and buyers.

Frequently asked questions