Life Insurance: When To Drop And How To Decide

Life insurance is a crucial financial safety net for many, but circumstances can change, and sometimes it's necessary to cancel a policy. While policyholders can cancel their life insurance at any time, insurance companies can only cancel a policy under specific circumstances. For example, an insurer cannot cancel a policy if the policyholder starts an unhealthy habit, moves to a different area, or buys other life insurance. However, an insurer can cancel a policy if the policyholder stops paying premiums or commits fraud during the application process. This article will explore the reasons for cancellation and the process of cancelling a life insurance policy.

Non-payment of premiums

Grace Periods

After a premium payment deadline is missed, most life insurance companies offer a grace period, typically lasting 30 days, though it can be as long as 60 days, depending on the state. During this time, the insurance company will send a late-payment notification, and as long as the payment is made within the grace period, the coverage will remain in place.

Cancelling the Policy

Once the grace period has passed, the insurance company can cancel the policy. You may be able to have the policy reinstated, but this is not guaranteed and the process becomes more difficult the longer the coverage has lapsed. The insurer may ask for new health information or require another medical exam.

Avoiding Cancellation

There are several steps you can take to avoid cancellation due to non-payment:

• Set up automatic payments from a bank account or credit card.
• Ask a trusted friend or relative to serve as a backup payment contact.
• Set a recurring reminder in your calendar, allowing enough time to submit the premium.
• If the grace period is almost over, pay online, overnight mail, or over the phone.

Fraud or falsehoods on the application form

During the underwriting process, insurers verify the information provided by the applicant by pulling third-party records, including prescription medication records, driving records, reports from the Medical Information Bureau (MIB), and credit history. They may also conduct personal interviews with friends and relatives. Any discrepancies between the insurance application and medical files will likely be spotted.

If falsehoods in the application are discovered during the contestability period, which is typically the first one or two years of the policy, the insurance company can cancel the policy. Even if the falsehoods are discovered after the insured person dies, the life insurance company could still refuse to pay out the death benefits.

To avoid cancellation for fraud, individuals must be completely truthful on their life insurance applications. It is also recommended to work with a licensed agent or broker, who can help navigate the application process and ensure accuracy.

Cancelling during the free look period

The free look period is a window of time at the beginning of a life insurance policy during which the policyholder can terminate the policy without incurring any penalties, such as surrender charges, and receive a full refund of their premium. This period usually lasts for 10 to 30 days, depending on the insurer and state law. All 50 states and Washington, D.C., require free look periods, and the minimum length varies from 10 to 30 days.

During the free look period, the policyholder can decide whether they want to keep the insurance policy. If they are not satisfied with the terms and conditions of the policy or simply change their mind, they can cancel it and receive a refund. The free look period is designed to give policyholders a risk-free opportunity to review their coverage and ensure it meets their specific needs.

To cancel a life insurance policy during the free look period, the policyholder needs to contact their insurer. It is important to note that the free look period has a specified timeframe, and if the policyholder decides to cancel after this period ends, they will not be penalized, but they will not receive a refund of their premium.

The free look period is beneficial for policyholders as it provides additional time to review a new contract in-depth and seek advice from an agent, lawyer, or company representative. It also allows policyholders to cancel their policy without any financial consequences if their circumstances change. For example, if their financial situation improves or they find better coverage elsewhere, they can take advantage of the free look period to cancel their current policy without penalty.

Cancelling a whole life insurance policy

Reasons for Cancellation

There are several reasons why you might consider cancelling your whole life insurance policy:

• You no longer need coverage: If your family is financially independent, or your debts have been paid off, you may no longer require life insurance as part of your financial portfolio.
• Changing investment strategies: You may find that alternative financial vehicles, such as annuities or mutual funds, offer better investment options than your current policy.
• Affordability: If the premiums are no longer affordable, you may want to cancel your policy. However, there are other options to consider before making this decision, such as reducing the coverage amount or switching to term life insurance.
• Switching policies or companies: If you've found a new policy that better suits your needs, ensure that your new policy is in force before cancelling your existing one to avoid gaps in coverage.

Understanding Whole Life Insurance Cancellation

Steps to Cancel a Whole Life Insurance Policy

• Contact your insurance company: Discuss your options with your insurer, as each policy has slightly different rules regarding cancellation. They can guide you through the specific steps and consequences of cancellation.
• Understand the financial implications: Cancelling a whole life insurance policy may result in financial penalties and taxes on any interest earned from the policy's cash value. There may also be surrender charges, especially if you haven't held the policy for a long period.
• Explore alternative options: Before cancelling, consider alternative options such as reduced paid-up insurance, which allows you to stop paying premiums in exchange for a lower death benefit. You may also be able to exchange your policy for another life insurance policy or an annuity, or sell your policy using a life settlement company. However, these options can be complicated, so it is advisable to consult a financial advisor or tax professional.
• Provide written notice: While not always required, submitting a formal written notice of cancellation to your insurance company can give you peace of mind.

Remember, cancelling a whole life insurance policy is a significant decision that can have financial consequences. Carefully consider your options and discuss them with your insurance company and financial advisors before proceeding.

Cancelling a term life insurance policy

Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years, and is a popular choice for those seeking affordable coverage. If you decide to cancel your term life insurance policy, there are a few simple ways to do so:

• Stop premium payments: By stopping your premium payments, you will trigger a grace period on your insurance policy, typically lasting 30 to 60 days. During this time, you can make up missed payments and maintain your policy. However, if you let the grace period expire without further payments, your insurance coverage will end.
• Contact your insurance provider: You can call or send a letter to your insurance company, notifying them of your cancellation. Most insurers can cancel your policy over the phone or through an online process. Have your policy number handy to facilitate the process.
• Provide written notice: Although not required, a formal written notice can give you peace of mind. You can check your provider's website, as some insurers offer a way to submit your notice online.

It's important to note that cancelling a term life insurance policy will not result in a payout, as it does not accumulate cash value over time. Additionally, if you're considering cancellation due to affordability issues, there are alternative options to explore:

• Convert to a permanent policy: Many term policies include a conversion rider, allowing you to switch to a permanent policy without a new medical exam.
• Reduce the policy's face amount: Contact your insurance agent to discuss reducing the coverage amount, which can lower your premium payments while still providing some level of protection.
• Explore other insurance providers: You may be able to find a more competitive rate with another insurance company that better suits your needs.

Remember, cancelling your life insurance policy should be a well-thought-out decision. Ensure that you understand the implications and explore alternative options before proceeding with the cancellation.

Frequently asked questions