How To Get A Refund On Permanent Life Insurance Policies

Life insurance is a financial safety net for your family in the event of your death. While it is a good idea to have one, you might be hesitant to make years of payments toward a policy that may never pay out. Return of premium (ROP) term life insurance removes this possibility by refunding all premiums paid if you outlive the policy term. However, ROP policies are typically two to three times more expensive than standard term life insurance policies, and the refunded premiums do not include any interest. In addition, only a limited number of insurers offer ROP policies. Before deciding to cancel your permanent life insurance policy, it is important to consider the costs and fees involved, as well as the impact on your financial future.

When can I get a refund?

You may be able to get a refund, or a partial refund, when you cancel your permanent life insurance policy. However, this depends on the type of policy you have.

When You Can Get a Refund

If you have purchased a return of premium term life insurance policy, you can receive a refund for your premiums. This type of policy is just what it sounds like: when the term of the policy is up, your insurance provider will return your premiums to you. Typically, you will receive the entire sum of the premiums you have paid, and that money will not be taxed; however, any fees or the cost of any additional riders that were added to the policy may not be returned. Also, the cost of this type of policy is usually higher than a standard term policy.

If you have a whole life or universal life insurance policy, you will usually get a refund of your premiums minus any fees or charges. This is because these policies accumulate cash value over time, so you may get some of this value back upon cancellation. However, if you cancel a permanent life insurance policy and cash out its funds, you may be subject to surrender fees and taxes on the withdrawn amount.

When You Won't Get a Refund

If you have a standard term life insurance policy, you won't be refunded your premiums when the coverage period has ended. Term life insurance policies do not have a return of premium component, and they do not build up cash value. Therefore, if you cancel a term policy, you will lose your death benefit and won't be entitled to any refund.

What are the alternatives to a refund?

If you're looking for alternatives to a refund on your permanent life insurance, there are a few options to consider:

• Lower your coverage amount: If you're struggling to afford your insurance premiums, you can consider lowering your coverage amount. This option may not provide enough financial support to your dependents if you pass away, but it's better to have some coverage than none. Most insurers allow you to request a decrease in coverage at least once during your policy.
• Reduced paid-up life insurance: If you have a whole life insurance policy, you can look into this option, which lets you stop paying premiums and instead use your cash value to purchase a policy with a reduced death benefit.
• Flexible premiums and benefits: Universal life insurance policies offer flexible premiums and death benefits, so you may be able to lower your premium if you're facing financial hardship.
• Utilise your cash value: You can use the cash value you've built up on your permanent policy to cover your premiums until your financial situation improves. Just make sure your cash value doesn't drop below the minimum required amount, which is usually equal to your premium and any other policy fees, to avoid your policy lapsing.
• Retake your medical exam: If your health has improved since your last medical exam (for example, if you've quit smoking or avoided high-risk hobbies), you may qualify for a lower-risk class and more affordable premiums.
• Exchange your policy: If your life insurance policy no longer suits your needs, you can exchange it for a new one without incurring tax liabilities on investment gains. This is known as a 1035 exchange or a like-kind exchange and is permitted by the Internal Revenue Service. However, it's a complicated process, so it's best to consult a tax professional.
• Sell your policy: If you no longer need life insurance coverage, you can sell your policy through a viatical settlement or a life insurance settlement. A viatical settlement is when an insured individual with a terminal diagnosis is paid the death benefits from their policy. A life insurance settlement, on the other hand, is when an individual without a terminal diagnosis sells their policy to a third-party provider. It's important to note that in both cases, the policyholder forfeits their right to a death benefit, so this may not be a suitable option if your family relies on this financial support.

Before making any decisions, it's always a good idea to consult an insurance expert, financial advisor, or tax professional to discuss your specific circumstances and explore all your options.

What happens if I cancel my permanent life insurance policy?

Cancelling a permanent life insurance policy is a fairly straightforward process, but there are some important financial considerations to keep in mind. Here's what you need to do and what you can expect if you decide to cancel your permanent life insurance policy:

Steps to Cancel Your Permanent Life Insurance Policy:

• Contact your insurance company and request cancellation. You may need to provide written notice or complete a cancellation form. Make sure to follow the correct procedure to avoid delays or additional fees.
• Be aware of any surrender charges or fees. If you have a whole life insurance policy, you may be charged a surrender fee, which is typically a percentage of the policy's face value.
• Understand the tax implications. If you cancel a policy with a cash value that exceeds the premiums paid, you may owe taxes on the proceeds. Consult a tax professional for guidance.
• Consider the financial impact on your beneficiaries. Cancelling your policy means they will no longer receive a death benefit when you pass away.

What Happens When You Cancel Your Permanent Life Insurance Policy:

• You will receive a refund for the policy's cash value. This is the amount you've paid into the policy minus any fees or charges. However, this amount may be less than the total premiums paid due to administrative costs and cancellation fees.
• If you've prepaid for the coming year, you may receive a prorated refund for the remaining months. For example, if you cancel at the start of the sixth month and had paid for the whole year, you might get a refund of 50% of your annual premium.
• Keep in mind that the refund may take some time to process. You should receive the funds within 30 days, but it could vary depending on the insurance company.
• If you've accumulated cash value in your policy, you can choose to surrender your policy and receive a check for the cash value, minus any applicable fees and taxes.
• Cancelling your permanent life insurance policy will result in losing your life insurance protection. If you still want coverage, you may need to purchase a new policy, which could be more expensive or have different terms.

What are the pros and cons of getting a refund?

Pros of Getting a Refund:

There are a few advantages to getting a refund on your permanent life insurance policy. Firstly, if you have paid for coverage that you no longer need or want, getting a refund can provide financial relief. This is especially true if you have been paying premiums for a significant period. The refunded money can be used to cover other expenses or invested elsewhere. Additionally, if your financial situation has changed and you can no longer afford the premiums, cancelling the policy and getting a refund can help ease financial constraints.

Cons of Getting a Refund:

There are several disadvantages to consider before seeking a refund on your permanent life insurance policy. Firstly, you will likely incur costs such as surrender charges and fees, which can be substantial and may outweigh the benefits of cancelling. For example, surrender charges for whole life insurance policies can be between 5% and 10% of the policy's face value. Additionally, the refunded amount may be less than the total premiums paid due to administrative costs and cancellation fees. The refund may also be subject to taxes, further reducing the amount you receive. Cancelling your policy also means losing your coverage and the death benefit associated with it, which could leave your dependents without financial support in the event of your death. Finally, if you decide to purchase life insurance again in the future, it may be more expensive due to your increased age and any changes in your health condition.

How do I cancel my policy?

The process of cancelling your life insurance policy will vary depending on the insurer, but generally, you will need to contact your insurance company and request cancellation. You may need to provide written notice or complete a cancellation form. It is crucial to follow the correct procedure to avoid delays or additional fees.

If you have a term life insurance policy, there are several ways to cancel it:

• Stop paying your premiums and let your coverage end.
• Wait until the term ends and allow the policy to expire.
• Let your insurance company know of your intent to cancel via phone call or mail.

Please note that cancelling your term policy means you won't get any refund and will lose your death benefit. If you have a return of premium rider, your insurer will return a portion or all of the money you've paid if you haven't used the policy once your term ends.

To cancel a permanent life insurance policy, you can surrender or cash out your policy before you die. However, liquidating your policy's cash value means losing life insurance protection and may incur surrender charges and taxes.

Your cash surrender value—the amount you receive if you surrender your policy—is equal to the amount of cash value built up minus any surrender charges. Surrender charges are penalty fees that typically decrease over time. In addition to these charges, you may owe income taxes on the withdrawn amount if the surrendered cash value exceeds the premiums you've paid into the policy.

Reasons for cancelling your life insurance policy

Financial changes or constraints

If you can no longer afford your premiums, cancelling your life insurance policy may be your only option. Before giving up your policy, consider cutting down on non-essential spending or evaluating your insurance portfolio to ensure you're not overpaying in certain areas.

Policy no longer meets your needs

Your life insurance policy may no longer be necessary if your goals and financial situation have changed since purchasing it. For example, you may have initially bought a policy to replace lost income as the primary earner, but your family may no longer be dependent on your income. Alternatively, you may have taken out a policy to pay off a mortgage, only to find that you've paid it off earlier than expected.

Finding a better-suited policy

If you can afford higher premiums, you may opt to switch from a term policy to a permanent policy, which has a cash value component that allows you to increase its value over time. This value can be used to enhance your retirement fund, save for long-term care costs, or build an inheritance for your children. However, life insurance policies tend to yield subpar returns compared to other investments, so carrying a policy may not be worth the cost if you have no financial obligations.

Frequently asked questions