Life Insurance Policies: Can You Cancel Yours?

Life insurance is meant to help your family avoid financial hardship if you die. However, you may want to cancel your life insurance policy due to a change in your personal or financial circumstances. Cancelling your life insurance policy is a significant decision and the process varies depending on the type of policy you have and how long you've had it. This article will guide you through the steps to cancel your life insurance policy and offer alternatives to cancellation.

Getting consent from the insured

• Understand the insured's needs and situation – Before initiating any cancellation process, it is crucial to have a comprehensive understanding of the insured's circumstances and requirements. This includes assessing their financial situation, family dynamics, health conditions, and lifestyle choices. By doing so, you can effectively evaluate the impact of cancelling the policy on their protection and well-being.
• Discuss the reasons for cancellation – Have an open and honest conversation with the insured about their intentions to cancel the policy. Explain the potential consequences, such as losing coverage and forfeiting current rates. It is important that they fully comprehend the implications of their decision.
• Explore alternative options – Before proceeding with cancellation, explore a range of alternative solutions that could address the insured's concerns. This may include reducing the coverage amount, adjusting the beneficiaries, or even switching to a different type of policy that better suits their needs. By presenting these options, you provide the insured with the opportunity to make an informed decision.
• Obtain written consent – Once the insured has considered all the options and confirms their intention to cancel, it is essential to obtain their written consent. This can be in the form of a signed letter or a completed cancellation form provided by the insurance company. This step ensures that the insured fully understands and agrees to the cancellation, protecting both parties involved.
• Provide necessary support – Throughout the process, offer the insured any assistance they may need. This could include helping them understand the complex terms and conditions of the policy, explaining the financial implications, or even referring them to a trusted financial advisor for further guidance. Your support can make the cancellation process less daunting and ensure the insured feels confident in their decision.
• Follow up after cancellation – Even after the policy is cancelled, maintain open lines of communication with the insured. Check in with them to ensure they are satisfied with their decision and address any concerns or regrets they may have. This demonstrates your commitment to their well-being and can help build a positive long-term relationship.

Proving insurable interest

Insurable interest is a prerequisite for purchasing an insurance policy. It is what separates the insurance business from gambling. Insurable interest refers to the right of property to be insured. It is the basis of all insurance policies, linking the insured and owner of the policy.

Insurable interest can be defined as a type of investment that protects anything subject to a financial loss. A person or entity has an insurable interest in an item, event, or action when its damage or loss would cause financial loss or hardship. To have an insurable interest, a person or entity would take out an insurance policy protecting the person, item, or event in question. The insurance policy would mitigate the risk of loss if something were to happen to the asset.

Insurable interest is established by ownership, possession, or direct relationship. For example, people have an insurable interest in their own homes and vehicles but not in their neighbours' homes and vehicles. In the case of life insurance, someone has an insurable interest in you if they would experience financial loss and hardship should you die.

A beneficiary must have an insurable interest in the person who is being insured if they are purchasing insurance on that person's life. State laws differ, but generally, the following individuals would be considered to have an insurable interest in your life:

• Your spouse or former spouse
• Your children or grandchildren
• A special needs adult child
• An employer (under certain arrangements)

Prior to offering coverage, the insurer will take steps to verify insurable interest. These steps may include requesting identification from the involved parties and will also likely involve a phone interview, where the insurer inquires about relationships and insurable interest. If you are unable to prove insurable interest, the insurer may not issue the insurance policy.

Choosing the right policy

Choosing the right life insurance policy depends on several factors, including your budget, age, health, preferences, and risk tolerance. Here are some key considerations to help you select the most suitable policy for your needs:

• Identify the purpose of the policy: Think about why you want the policy and what you hope to achieve from the death benefit. Do you want to cover end-of-life expenses, pass on an inheritance, or ensure your family is financially supported if you pass away unexpectedly? Understanding your primary motivation can help guide your decision-making process.
• Evaluate your financial situation: Consider your income, expenses, debts, and future financial obligations. Calculate how much money would be required to maintain your beneficiaries' standard of living or meet specific financial goals, such as your children's education or your spouse's retirement. This will help you determine the appropriate level of coverage.
• Understand the different types of policies: The two main types of life insurance are term and permanent. Term life insurance covers you for a specific period, usually 10, 20, or 30 years, and is generally more affordable. Permanent life insurance, on the other hand, lasts for your entire life and often includes a savings or investment component. It is essential to research the various permanent life insurance options, such as whole life, universal life, and variable life, to understand their unique features and benefits.
• Assess your budget: Determine how much you can comfortably spend on life insurance premiums each month and year. Consider the trade-off between affordability and the level of coverage you desire. Term life policies tend to be more budget-friendly but may offer fewer benefits and no cash value component.
• Consider your health and age: Your age and health are critical factors in determining the cost of life insurance. Generally, the younger and healthier you are, the lower your premiums will be. If you are young and in good health, locking in lower rates with a long-term policy may be advantageous.
• Shop around and compare quotes: Don't settle for the first policy you come across. Gather quotes from multiple reputable insurance providers and compare their terms, benefits, and prices. This will help you find the best combination of coverage, company reputation, and cost.
• Seek professional guidance: If you feel overwhelmed or unsure, consider consulting a financial advisor or licensed insurance agent. They can provide personalised advice and help you navigate the complexities of selecting the right policy for your unique circumstances.

Submitting an application

The first step to cancelling your life insurance policy is to submit an application. You can do this by contacting your insurance provider. The process for cancelling a term life insurance policy is generally straightforward, whereas cancelling a whole life insurance policy is more complex.

For term life insurance, you can simply stop making premium payments, which will trigger a grace period (usually 30 days) where you can make up any missed payments. If you don't make any payments during the grace period, your insurance coverage will end. Alternatively, you can call or send a letter to your insurance company to notify them of the cancellation. Some insurers also offer the option to submit your notice online.

For whole life insurance, you will likely need to pay financial penalties and taxes on any interest earned from the cash value of the policy. You can opt for reduced paid-up insurance, which allows you to stop paying premiums in exchange for a lower death benefit. You can also exchange your insurance policy for another life insurance policy or an annuity, or sell your policy using a life settlement company. However, selling your policy may result in commissions and fees, and if you make a profit on the sale, the payout will be subject to income tax.

Preparing the insured for medical exams

Preparing for a life insurance medical exam is important as it ensures the best results possible. Here are some tips to help the insured prepare for the medical exam:

• Schedule the exam for the morning: As fasting is often required before the exam, it is best to schedule the exam for the morning. This also allows the insured to skip their morning workout, keeping their blood pressure levels optimal for the exam.
• Drink plenty of water: Staying hydrated is recommended as it makes it easier for the technician to collect blood and urine samples.
• Wear short sleeves and lightweight clothing: This type of clothing makes it easier for the technician to draw blood and measure blood pressure.
• Make changes in advance: If the insured has been wanting to make some health improvements, this is a good time to start. Changes such as quitting smoking, exercising regularly, and eating healthily in the weeks and months leading up to the exam can positively impact the results.
• Have medical records and contacts on hand: Having easy access to medical records, including a list of current medications, can help the insured easily answer any questions the technician may ask.
• Get a good night's sleep: A good night's rest is important to ensure the insured feels well-rested and relaxed on the day of the exam.
• Avoid certain foods and medications: In the days leading up to the exam, it is recommended to cut back on red meat and foods that can elevate cholesterol levels. Over-the-counter medications such as decongestants and antihistamines should also be avoided as they can interfere with the results.
• Refrain from alcohol, smoking, and strenuous exercise: These activities can raise blood pressure and pulse, so it is best to refrain from them for at least 24 hours before the exam.

Frequently asked questions