Life Insurance Traps: Can Benefits Be Revoked?

Life insurance policies can be revoked or cancelled by the insurance company in limited circumstances, typically during the contestability period, which is usually the first one or two years of the policy. The two main reasons for insurers to revoke a policy are non-payment of premiums and fraud. If the policyholder stops paying premiums, the insurance company will usually provide a grace period of 30 to 60 days, after which the policy can be cancelled. Lying on a life insurance application is also grounds for cancellation and can lead to the insurance company refusing to pay out death benefits. Policyholders can cancel their life insurance policies at any time, but may be subject to surrender or cancellation fees, especially for whole life insurance policies.

Policyholders can cancel their life insurance by letting it lapse or surrendering it

Policyholders can cancel their life insurance policy by letting it lapse or surrendering it.

Letting the Policy Lapse

Policyholders can cancel their life insurance by simply discontinuing premium payments. This will cause the policy to lapse, and the policyholder will lose coverage. However, policyholders cannot recover any premiums paid once the policy lapses. By law, insurance companies must provide a grace period, usually 30 days, but extended to 60 or 90 days during the COVID-19 pandemic, during which policyholders can make outstanding payments to reinstate their policy. After the grace period, the policy is usually considered void, although some insurance companies offer a reinstatement period. Reinstating a policy comes with fees but is generally cheaper than taking out a new policy.

Surrendering the Policy

Policyholders can also cancel their life insurance policy by surrendering it. Surrendering a policy means taking the cash surrender value from the insurance company and forgoing the death benefit. Whole and universal policies accrue cash value over time, so they are the most likely to be surrendered. Surrendering a policy can rid the policyholder of the burden of monthly premiums and provide funds for other investments or necessities. However, surrendering a policy may incur surrender fees, and the gain on the policy will be taxed as income. Death benefits are tax-exempt. Policyholders should consult a tax professional before making a decision.

Policyholders may receive a refund of their premiums minus fees and charges

Policyholders may be able to receive a refund of their premiums minus fees and charges, depending on the type of life insurance policy they have.

Term life insurance policies do not build up cash value, so cancelling the policy will not result in a refund. However, permanent life insurance policies, such as whole or universal life insurance, may result in a refund of the premiums paid minus any applicable fees and charges. These policies accumulate cash value over time, so policyholders may get a portion of this value back upon cancellation.

The amount of the refund will depend on factors such as the length of time the policy has been in force, the length of the policy's premium payment period, and the face amount of the policy. The cash value of a whole life insurance policy, for example, will increase over time and will eventually equal the face amount of the policy, typically when the insured reaches the age of 100.

It is important to note that cancelling a life insurance policy will also incur costs, such as surrender charges, which could outweigh the benefits of cancelling. Policyholders should carefully evaluate these costs and consider alternative options, such as reducing their coverage or withdrawing from or borrowing against the policy's cash value, before deciding to cancel their policy.

In addition, policyholders should follow the correct procedure for cancelling their policy to avoid delays or additional fees. This usually involves contacting the insurance company and requesting cancellation, as well as providing written notice or completing a cancellation form.

Cancelling a life insurance policy may incur costs such as surrender charges

Cancelling a life insurance policy may result in costs such as surrender fees or charges. Surrender fees are typically a percentage of the policy's cash value, which is the total sum in the savings component of permanent policies like whole and universal life insurance. These fees are usually high in the early years of the policy and then gradually decrease over time. The surrender fee is deducted from the policy's cash value, leaving the policyholder with the cash surrender value.

The surrender charge amount is usually a percentage of the policy's cash value and decreases yearly. For example, a surrender charge may start at 10% in the first year and decrease by 1% each year until it reaches 0% in the tenth year. If you decide to surrender your policy in the sixth year, you will pay a surrender charge of 5% of the cash value.

In addition to surrender fees, there may be other costs associated with cancelling a life insurance policy. For example, if you have a whole life insurance policy, you may be required to pay taxes on the earnings over the amount you have paid into the policy. It is important to carefully review the terms and conditions of your policy to understand the potential costs of cancellation.

It is also worth noting that the process for cancelling a life insurance policy may vary depending on the insurer. In general, 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.

Policyholders can cancel their life insurance by contacting their insurance company

Policyholders can cancel their life insurance at any time by contacting their insurance company. The process varies depending on the insurance provider, but it generally involves calling or writing to them to inform them of your decision to terminate the policy. You may also need to fill out a cancellation form. It is important to follow the correct procedure to avoid delays or additional fees.

If you have recently purchased your life insurance policy, you are likely still 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 paid. This is a good option if you have buyer's remorse or have found a better policy.

If you have had your policy for longer, the process of cancellation depends on the type of policy you hold. Term life insurance policies are generally straightforward to cancel—you can simply stop paying premiums and walk away. Permanent life insurance policies, on the other hand, are more complex due to their cash value component. If you surrender a permanent policy, you will receive the "surrender value", which is the cash value minus any surrender fees and outstanding loans. It is important to note that surrender fees are typically higher in the early years of the policy, so you may not receive a substantial payout if you cancel during this time.

Before cancelling your life insurance policy, consider the costs and fees involved, as well as the impact on your financial situation. Cancelling your policy will likely result in a net loss, so it is important to evaluate your reasons for cancellation and consider alternative options, such as reducing your coverage or borrowing from your cash value. Additionally, keep in mind that if you cancel your policy and decide to purchase life insurance again in the future, your rates will likely be higher due to your increased age.

Life insurance companies can cancel policies if the policyholder stops paying premiums

After a payment deadline passes, life insurance customers get a grace period, usually 30 to 60 days, depending on the state where they live. The life insurance company will send a late-payment notification. As long as the policyholder pays during the grace period, the coverage stays intact.

However, once the grace period passes, the life insurer can cancel the policy. The policyholder can ask to have it reinstated but they must act quickly. The longer the coverage has lapsed, the more likely the insurer will ask for new health information or require another medical exam.

• Set up automatic payments from a bank account or credit card.
• Ask a trusted friend or relative to serve as backup. Fill out a form provided by the insurer to designate someone to receive late-payment notices. The company will send notices to the policy owner and the designated person.
• Set up a recurring reminder in your calendar, allowing enough time to submit the premium.
• If you are close to the end of the grace period, consider paying online, sending your premium by overnight mail, or calling the insurance company and paying over the phone if you can.

If a policyholder can no longer afford to pay premiums, they might consider reducing their life insurance coverage or switching from whole life insurance to term life insurance, which can be a lot cheaper.

Frequently asked questions