Universal Life Insurance: Can You Cancel Your Policy?

Universal life insurance policies have been marketed as an alternative to whole life insurance, but they have not stood the test of time. Policyholders have been hit with skyrocketing premiums, and some have realised that their permanent policies will expire before they do, or lapse if they cannot keep up with payments.

If you are considering cancelling your universal life insurance policy, you should first understand exactly what you have. Start by requesting an In Force illustration of your policy, which will show the exact results of what has happened from the policy's inception to the present day, including premiums paid and growth of cash value. You can obtain this by contacting your insurance company directly or the agent who sold you the policy.

If you decide to go ahead and cancel your policy, you will need to contact your insurance company and request cancellation. You may need to provide written notice or complete a cancellation form. You will then receive a check for your policy's cash value, which is the amount you've paid minus any fees or charges.

Surrender charges and fees

The amount of surrender charges and fees varies depending on factors such as gender, tobacco class, issue age, and duration. For example, the surrender charge period for a 35-year-old male with a standard tobacco rating class ranges from 15 years (for ages 0-75) to 8 years (for ages 81-85). Surrender charges can also depend on the type of policy. For annuities and life insurance, the surrender fee often starts at 10% if you cash in during the first year, decreasing to 1% in the ninth year, and no surrender fee after the tenth year.

It's important to note that universal life insurance policies rarely have guaranteed premiums or death benefits. Therefore, it's crucial to consider the "worst-case scenario" projections when evaluating the potential surrender charges. If interest rates or the stock market perform poorly, will the policy still be able to cover the rising costs?

In addition, there may be tax implications when surrendering a universal life insurance policy. If the cash value of the policy is higher than the amount you've paid in premiums, you may owe taxes on the difference. This is because the cash value in whole and universal life insurance policies grows tax-deferred, and once it is withdrawn or the policy is surrendered, it may be subject to taxation.

Before making any decisions about cancelling your universal life insurance policy, it's important to understand the potential surrender charges and fees, as well as any other alternatives available to you.

Cancelling within the first year

Universal life insurance policies are a type of permanent life insurance that has been marketed as an alternative to whole life insurance policies. However, they have not stood the test of time, with policyholders facing skyrocketing premiums and the risk of their policies lapsing if they cannot keep up with payments. As a result, lawsuits have been filed by policyholders who feel they were misled about the true nature of universal life insurance.

If you have had a universal life insurance policy for less than a year and are considering cancelling it, there are a few things you should know. Firstly, you may be able to get a refund of your premiums if you cancel within the first year, but there may also be fees associated with cancelling the policy. These fees can include cancellation fees and surrender charges, which are typically a percentage of the premiums you have paid and the cash value accumulated in your policy, respectively.

Before making any decisions, it is important to understand exactly what your policy covers. Some universal life policies only provide coverage up to a certain age, such as 90, 95, or 99. Additionally, some policies may have a "crossover point", where the policy stops growing in cash value and starts consuming it. This can lead to increased premiums or a lapsed policy. To get a full picture of your policy, you can request an "In Force illustration" from your insurance company or agent, which will show the results of your policy from its inception to the present, as well as future projections.

If you decide to cancel your universal life insurance policy within the first year, 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 important to follow the correct procedure to avoid delays or additional fees.

Keep in mind that by cancelling your policy, you will lose the death benefit and may have to pay taxes on any money you receive from the policy. There may also be alternative options to cancellation, such as reducing the death benefit or exchanging your policy for a different type of life insurance product. Carefully consider the costs and benefits of cancelling your policy before making a decision.

Cash value and death benefit

Universal life insurance is a type of permanent life insurance that offers flexible premium payments and lifelong coverage. It also includes a cash value component, which functions similarly to a savings account. This means that the cash value can grow over time, and policyholders can borrow against it or withdraw from it.

Cash Value

The cash value of a universal life insurance policy earns interest at a rate set by the insurer, which can change frequently but usually has a minimum rate. The cash value can be used in several ways. Policyholders can borrow against it, make withdrawals, or use it to pay premiums or cover mortality costs. However, it is important to monitor the cash value, as underfunding the policy may result in large payment requirements or policy lapse. Additionally, any outstanding loans or withdrawals will reduce the death benefit paid to beneficiaries.

Death Benefit

Universal life insurance policies typically offer flexible death benefits, allowing policyholders to increase or decrease the amount based on their needs. There are two types of death benefits: level death benefit and increasing death benefit. A level death benefit remains the same throughout the policy, while an increasing death benefit adds the cash value balance to the death benefit payout.

When deciding whether to cancel a universal life insurance policy, it is important to consider the potential financial implications, such as surrender charges and the impact on the cash value and death benefit.

Cancelling vs selling

Cancelling a universal life insurance policy is a significant decision that can arise for various reasons. You might find that your financial situation has changed, making the premiums no longer affordable. Perhaps you’ve secured a better policy that offers more favourable terms, or maybe you’ve reached a stage in life where the coverage is no longer necessary.

Cancelling a Universal Life Insurance Policy

Cancelling a universal life insurance policy is generally a straightforward process. You can cancel your policy at any time, but it's important to be aware of potential penalties and fees. If you're within the first few years of your coverage, known as the surrender period, you may face steep surrender fees and could lose a significant portion of your cash value. It's recommended to review your policy documents carefully to understand the specific terms and conditions of your policy.

To cancel your policy, start by contacting your insurance company. They will guide you through the necessary steps, which may include completing certain forms or providing written confirmation of your decision. It's important to ensure that you have a new insurance policy in place before cancelling your current coverage to avoid any gaps in protection.

Selling a Universal Life Insurance Policy

Selling your universal life insurance policy is another option to consider if you no longer want or need the coverage. This involves transferring ownership of your policy to a third party, typically a life settlement company or investor. The buyer will assume responsibility for future premium payments and will receive the full death benefit upon your passing.

Selling your policy can provide you with a lump sum payment, which is typically higher than the cash surrender value but less than the full death benefit. This option may be particularly attractive to older policyholders who are in good health and no longer need or want the policy.

However, it's important to note that selling your policy can take several months and may have tax implications. It's always recommended to consult with a financial advisor or insurance expert before proceeding with the sale of your policy.

Alternatives to universal life insurance

Universal life insurance is a type of permanent life insurance that offers the flexibility to adjust your premium payments (within certain parameters). It also allows you to decrease or increase your death benefit. Universal life insurance typically includes a cash value component that earns interest or other investment gains that grow tax-deferred.

Term Life Insurance

Term life insurance is a good alternative if you are looking for a more affordable option. It does not accumulate any cash value, and you won't receive a payout if you outlive the policy term. However, it can provide the necessary coverage for a specific period, such as until your children finish college or until you pay off your mortgage. Term life insurance is also a good option if you are unsure about committing to a permanent life insurance policy and want the flexibility to change your coverage in the future.

Whole Life Insurance

Whole life insurance is another type of permanent life insurance that offers fixed premiums and guaranteed death benefits. It also includes a cash value component that grows over time. Whole life insurance can be a good alternative if you are looking for more stability and guaranteed benefits. However, it tends to be more expensive than universal life insurance.

Variable Universal Life Insurance (VUL)

Variable universal life insurance is similar to universal life insurance but offers more flexibility in investing the cash value component. With VUL, you can choose to invest the cash value in a variety of investments, similar to a brokerage account. This option provides the potential for higher returns but also carries the risk of losing money, depending on the market's performance. VUL also offers flexible premiums and death benefits.

Indexed Universal Life Insurance (IUL)

Indexed universal life insurance is another variation of universal life insurance. With IUL, the cash value is tied to the performance of a specific stock index, such as the S&P 500. The cash value grows or declines based on the index's performance, but there are caps and floors in place to limit the potential gains and losses. IUL also offers flexible premiums and death benefits.

Guaranteed Universal Life Insurance (GUL)

Guaranteed universal life insurance offers set premiums and a guaranteed death benefit for a specific term, usually until the policyholder reaches a certain age. GUL does not have a cash value component, and the premiums tend to be lower compared to other universal life insurance options. It can be a good alternative if you are looking for guaranteed coverage without the complexity of the cash value component.

Frequently asked questions