Canceling Life Insurance: Understanding Termination And Its Implications

Life insurance is meant to provide financial help to your loved ones when you pass away. However, you may want to cancel your life insurance policy due to changing life circumstances or financial difficulties. You can cancel your life insurance policy at any time, but the process will differ depending on the type of policy and how long you've had it. This paragraph aims to provide an introduction to the topic of cancelling life insurance, highlighting the key considerations and steps involved in the process.

Cancelling term life insurance

Evaluate your reasons for cancellation:

Consider how important life insurance coverage is to you and your beneficiaries. Ask yourself if you still need the coverage, if there are any alternative options, and if cancelling the policy is the best decision for your situation.

Contact your insurance provider:

You can inform your insurance provider about your decision to terminate the policy. This can be done by calling them or sending a letter. Some insurers may also offer an option to submit your cancellation notice online. It is recommended to keep a written record of the cancellation and to confirm that your term life policy has been successfully cancelled.

Stop premium payments:

Stopping your premium payments is an effective way to initiate the cancellation process. If you have automatic payments set up, you will need to end these transfers by calling your insurance company. By stopping payments, you will trigger a grace period, usually lasting 30 days, during which you can make up any missed payments and keep your policy active if you change your mind.

Complete any necessary forms:

Your insurance provider may require you to fill out a cancellation form to finalize the process.

It is important to note that cancelling your term life insurance policy will result in losing your coverage. If you decide to purchase life insurance again in the future, your rates will likely be higher due to your increased age. Additionally, if you cancel in the middle of your payment cycle, you may receive a small refund for any unused portion of your premium.

Cancelling whole life insurance

Understanding Whole Life Insurance

Whole life insurance is a type of permanent life insurance that combines life insurance with an investment component. It provides lifelong coverage, with maximum coverage ages ranging from 95 to 121. Whole life insurance policies typically include a cash value component that grows over time. This means that the policy accumulates a cash value, and you can withdraw or borrow against it. However, it's important to note that withdrawing or borrowing from the cash value may reduce the death benefit for your beneficiaries.

Reasons for Cancelling Whole Life Insurance

There are several reasons why someone may want to cancel their whole life insurance policy:

• No longer needing life insurance coverage: If your family is financially independent, you may no longer need the death benefit provided by the policy.
• Inability to afford premiums: Financial circumstances, such as layoffs, rent increases, or inflation, may make it difficult to keep up with premium payments.
• Change in investment strategy: You may decide that the investment options offered by your whole life policy are not as competitive as other financial vehicles.
• Paying off debts: If you initially took out the policy to cover business debts or a mortgage, and you've since paid off these debts, you may no longer need the policy.

Steps to Cancel Whole Life Insurance

If you decide to cancel your whole life insurance policy, here are the steps you can take:

• Evaluate your reasons: Before making any decisions, carefully consider your reasons for cancellation and the importance of life insurance coverage for your situation.
• Contact your insurance provider: Get in touch with your insurance provider to inform them of your decision to terminate the policy. They may require you to fill out a cancellation form.
• Understand the cash value and surrender fees: If you have an older policy that has accumulated a significant cash value, contact your insurer to understand the surrender fees and requirements for cancellation. The surrender fees may eat into a large portion of the cash surrender value you receive.
• Fill out the necessary forms: Your insurance company will provide you with the required surrender forms and documentation to process the cancellation of your policy.
• Explore alternatives: Before making a final decision, consider alternatives such as reducing your coverage, withdrawing or borrowing from your cash value, or getting a new medical exam to qualify for lower premiums.

Important Considerations

When considering cancelling your whole life insurance policy, keep the following in mind:

• Surrender or cancellation fees: Newer whole life insurance policies often have high surrender fees, so it's important to weigh the costs and benefits before proceeding.
• Beneficiaries: Carefully consider your beneficiaries and whether they still depend on your income or pension.
• Estate plan: Evaluate your estate plan and explore options for repurposing your policy, such as naming a charity as a beneficiary instead of leaving a cash lump sum in your will.
• Selling your policy: You may be able to recover some of your premiums by selling your policy, but this process can take several months and may have tax implications.

Cancelling during the free look period

The free look period is a window of time, usually 10-30 days, during which you can cancel your life insurance policy without penalty and get a refund of any premiums paid. This period is designed to give you peace of mind, allowing you to cancel the policy for a full refund if your circumstances or needs change. For example, you may no longer need the policy because your new employer provides coverage, or you may simply have buyer's remorse.

To cancel during the free look period, simply contact your insurer. You can do this by phone or in writing. You will need to provide your reasons for cancelling and may need to fill out a cancellation form.

It's important to note that the free look period only applies if you've recently purchased the policy. After this period ends, you can still cancel your policy, but you won't get a refund of any premiums paid.

• Not all insurance companies offer a free look period, and it may not be available for all types of insurance plans. For example, in some health plans, the free look period is only provided when the policy has a 3-year tenure. So, be sure to read the policy documents carefully or ask the insurance provider if a free look period is offered.
• The free look period usually starts when you receive the physical policy documents and can last up to 15-30 days from that date. So, make sure you keep track of the date you received the documents to take advantage of this benefit.
• To request cancellation, you will typically need to submit a written request or fill out a cancellation form on the insurance company's website within the free look period.
• After submitting your cancellation request, the insurance company may ask you to provide certain details and documents, such as the date you received the policy, the reasons for cancellation, information about the agent, the policy contract, receipt of the first premium, and a cancelled cheque.
• Upon cancellation within the free look period, the insurance company will refund your premiums, but there may be some deductions. These could include charges for stamp duty, a proportionate premium for the coverage duration, and, in the case of health insurance policies, the insurer's share of medical test costs.

Cancelling after the surrender period

Cancelling a life insurance policy after the surrender period is a more straightforward process than doing so during the surrender period. Surrender periods can last up to 10 years or longer, depending on the insurance company and the type of policy. After the surrender period, you won't have to pay surrender fees, but you will still have to pay taxes on the amount you receive that's over the cost basis.

When you cancel a whole life insurance policy after the surrender period, you will receive your remaining cash value, and your coverage will be cancelled. The cash surrender value is the amount you receive after your insurance company takes out all applicable surrender fees, administrative fees, and any outstanding loans you might have through the policy. The longer you've owned the policy, the higher the cash surrender value will be.

If you want to cancel your term life insurance policy, you can do so by stopping your premium payments. You can also call or send a letter to your insurance company to notify them of the cancellation. If you have automatic payments set up, you may need to call the insurance company to end these transfers.

It's important to note that cancelling a life insurance policy may not be advisable if anyone still counts on your financial support. Ending your coverage not only leaves your loved ones unprotected but also forfeits your current rates. If you decide you need a policy in the future, your premiums will be higher.

Alternatives to cancelling life insurance

Before cancelling your life insurance policy, it is worth exploring other options to ensure you are making the right decision for your circumstances. Here are some alternatives to consider:

• Reduce your life insurance coverage: If you need coverage but cannot afford your current premiums, contact your life insurance company to discuss your options. They may be able to temporarily reduce your coverage amount.
• Withdraw or borrow from your cash value: Whole life insurance policyholders facing financial difficulties can withdraw from or borrow against the policy's cash value. However, be aware that this will reduce the death benefit your loved ones will receive.
• Ask for a new medical exam: If your health has improved since you bought your life insurance policy, a new medical exam may demonstrate this and make you eligible for a more competitive premium. This may be the case if you have quit smoking or recovered from a past health issue.
• Get a new life insurance policy: Shop around and compare quotes to find a new life insurance policy with more competitive rates.
• Switch to paid-up status: Whole life insurance policies may allow you to use cash value to pay all your premiums, although this will decrease your death benefit.
• Lower your death benefit: You can typically reduce the face value of your term or permanent policy to lower your premiums. Check with your insurer for details.
• Pay with dividends: If your policy is with a mutual company, it may be eligible to earn dividends based on the insurer's financial performance, which you can put towards your premium.
• Use the cash value: If you have a permanent life insurance policy, you may be able to use your policy's cash value to pay premiums, as long as you have built up enough.

Frequently asked questions