Orlando Harmon
Life insurance is a financial tool that helps reduce the risk of financial troubles for your loved ones after your death. While it's a good idea to have one, there are situations where you might want to cancel your life insurance policy. Cancelling your life insurance policy can be a complex process, depending on the type of coverage and how long you've had the policy. If you've recently purchased the policy, you're likely still within the free look period, which typically lasts 10 to 30 days and allows you to cancel without financial penalty and receive a full refund. Cancelling a term life insurance policy is generally straightforward and can be done by stopping premium payments or contacting your provider. On the other hand, cancelling a permanent life insurance policy, such as whole life or universal life, may be more involved due to the potential accumulation of cash value. When surrendering a permanent life insurance policy, you may receive a payout from the cash value, but this could be reduced by surrender charges and outstanding policy loans. It's important to carefully consider your options and the potential financial implications before making a decision.
| Characteristics | Values |
|---|---|
| When to stop your life insurance | When you have paid for your life's most significant expenses, such as your mortgage, or when you have accumulated significant savings in your retirement fund. |
| How to stop your life insurance | Contact your insurance provider, stop making payments, or cancel during the "free look" period. |
| Considerations before stopping your life insurance | Check with your beneficiaries, consider any health conditions that may impact a new policy, and understand surrender fees. |
| Alternatives to stopping your life insurance | Lower your coverage amount, use your cash value to cover your premiums, or shop for a new policy. |
What You'll Learn
Cancelling during the free look period
The free look period is a window of time, usually 10 to 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 and the flexibility to change your mind about your policy without financial consequence. It is important to note that the length of the free look period can vary depending on your location and insurance company, so be sure to check the exact details in your policy documents.
To cancel your life insurance policy during the free look period, simply contact your insurer. You can do this by calling them or, in some cases, submitting a request through their website. You will likely need to provide a reason for cancelling, and the insurance company may try to offer solutions to address your concerns. However, if you are still dissatisfied, you have the right to terminate the policy and receive a refund.
It is worth noting that the insurance company may not refund the entire premium amount. There may be certain deductions, such as charges for stamp duty or the proportionate premium for the coverage duration. Nonetheless, cancelling during the free look period allows you to avoid surrender or cancellation fees and get back a significant portion of your money.
If you have recently purchased a life insurance policy, be sure to take advantage of the free look period to carefully review the policy details and ensure it meets your needs. Don't hesitate to reach out to your insurer with any questions or concerns, as this can help you make a more informed decision about whether to keep or cancel the policy. Remember, this period is meant to provide you with flexibility and peace of mind.
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Cancelling term life insurance
One effective way to cancel your term life insurance is to stop your premium payments. If you have automatic payments set up, you'll need to call your insurance company to end these transfers. It's also a good idea to call your insurance agent or carrier directly to confirm the cancellation and ensure there are no further obligations on your part. Most insurers have forms or online options to finalize the cancellation process. Keeping a written record of cancellation and confirmation is always recommended.
Before cancelling, it's worth exploring other options. Many term policies include a conversion rider, which allows you to switch to a permanent policy without a new medical exam. If your premiums are difficult to manage, your insurance agent may be able to help you reduce the policy's face amount, lowering your premium payments while still providing some level of coverage.
When considering cancellation, it's important to assess your financial situation and future obligations. Review your debts, such as credit cards, mortgages, and future expenses like college tuition. Think about your family's ability to manage financially without your income and whether they can keep up with daily expenses and payments. If you have significant savings and your biggest financial obligations are settled, you may be in a position to cancel your term life insurance.
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Cancelling permanent life insurance
Understanding Permanent Life Insurance
Permanent life insurance, such as whole life or universal life, is designed to provide lifelong coverage, typically until the age of 95-121. It also includes a cash value component that grows over time. This means that cancelling or "surrendering" a permanent life insurance policy involves more than just stopping payments.
Surrendering a Permanent Life Insurance Policy
When you surrender a permanent life insurance policy, you may receive a payout from the cash value. However, this payout is often reduced by surrender charges, especially if you haven't held the policy for many years. Surrender fees can significantly reduce or even eliminate the cash value you receive, especially in the early years of the policy. Over time, these fees decrease, but it's important to understand that the cash value might not be as substantial as expected if you surrender the policy prematurely.
Outstanding Policy Loans and Withdrawals
If you have any outstanding policy loans, your surrender value will be reduced by the balance (unpaid loan plus accrued interest). Additionally, if you have made any withdrawals from the policy, this will permanently reduce the available cash surrender value.
Alternatives to Cancelling Permanent Life Insurance
Before cancelling your permanent life insurance policy, consider the following alternatives:
- Using the cash value to pay premiums: You may be able to use the accumulated cash value of your policy to cover premium payments or mortality costs, depending on the policy type. However, borrowing against or withdrawing from your cash value can reduce the death benefit for your beneficiaries. If the loan isn't repaid, the outstanding amount, plus interest, will be deducted from the policy's death benefit.
- Tax-free exchange: You can surrender your life insurance policy and roll over the money into a new policy without paying taxes. This is known as a 1035 exchange. Make sure to follow the insurance company's instructions to avoid inadvertently triggering income tax on the cash value.
- Viatical or life settlement: If you have a terminal illness or are over the age of 65, you may be able to sell your life insurance policy to a third party. A viatical settlement involves selling your policy when you have a life expectancy of less than two years, while a life settlement is for those who are in reasonably good health but no longer need or can't afford the policy.
Understanding the Financial Implications
When cancelling permanent life insurance, it's important to consider the financial implications. Here are some key points to keep in mind:
- Full refund during the free look period: If you cancel your policy during the initial "free look" period, which typically lasts 10-30 days, you can get a full refund of any premiums paid. This period gives you a risk-free opportunity to reconsider your decision.
- Cash value payout: Permanent life insurance policies build cash value over time. If you cancel your policy, you could receive a payout based on the cash surrender value, minus any surrender charges and outstanding loans.
- Outstanding loans and withdrawals: Any unpaid loans and withdrawals will reduce your payout. Withdrawals permanently reduce your policy's death benefit and cash surrender value.
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Surrendering a permanent policy
Surrendering a permanent life insurance policy means cancelling the policy and receiving a payout from the cash value that has accumulated over time. This payout is known as the cash surrender value.
How to Surrender a Permanent Life Insurance Policy
To surrender your permanent life insurance policy, you must contact your insurance company and initiate the surrender process. They will inform you of any required documentation and fees. After submitting the necessary documentation, you will receive the cash surrender value, usually via check or electronic transfer. Finally, you will receive confirmation of the policy's termination.
Factors Affecting the Cash Surrender Value
The cash surrender value is the amount of money that will be returned to you upon surrendering the policy. It is calculated as the cash value minus any fees, loans, or premiums owed. Surrender fees, which decrease over time, will also be deducted from the cash value. Therefore, it is ideal to wait until the surrender fee is minimal or non-existent before surrendering your policy.
Consequences of Surrendering a Permanent Life Insurance Policy
There are several consequences of surrendering your permanent life insurance policy. Firstly, your life insurance coverage will end, and your beneficiaries will not receive a death benefit. Secondly, surrendering the policy can result in a financial loss, as the cash surrender value is often lower than the total premiums paid. Additionally, you may be responsible for paying surrender fees and taxes on any amount received above your tax basis. Finally, if you have an outstanding loan from the policy, you may receive a tax bill.
Alternatives to Surrendering Your Policy
If you are looking for ways to receive more money from your life insurance policy, you may consider selling it in a life settlement. A life settlement typically pays four times the cash surrender value. In a life settlement, you sell your policy to a third-party buyer, who takes over ownership and premium payments and receives the death benefit. Life settlements are generally intended for older individuals in declining health.
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Cancelling due to unaffordable premiums
If you're struggling to afford your life insurance premium, you may want to cancel your policy. However, before you do, it's worth exploring other options that could help you keep your policy active.
Contact your insurance agent
Your insurance agent may be able to help you reduce the policy's face amount, which can lower your premium payments and make the policy more affordable while still providing some level of cover.
Convert to an extended-term policy
Some providers offer a non-forfeiture option that allows you to stop paying premiums altogether and agree to a smaller death benefit. The policy will no longer build up cash value, but you can convert to an extended-term policy with a death benefit equal to the value of cash savings already accumulated in the policy.
Use the cash value to pay the premium
If you have a permanent life insurance policy, you might be able to use your policy's cash value to pay your premium. Depending on how much cash value you've built up, you can withdraw or borrow against it. However, keep in mind that this will reduce the death benefit your beneficiaries will receive.
Switch to paid-up status
If you have a whole life policy, you might be able to use cash value – if you have enough – to pay all your premiums. This will decrease your death benefit.
Lower your death benefit
You can typically reduce your term or permanent policy's face value to lower premiums.
Pay with dividends
If your policy is with a mutual company, it might be eligible to earn dividends based on the insurer's financial performance, which you can put towards your premium.
If you decide to cancel your policy, the process will depend on the type of policy you have and how long you've had it.
Term life insurance
You can simply stop paying premiums and allow a term life policy to lapse, meaning coverage will end. You may also be able to cancel your policy and receive a partial refund for any months you've paid in premiums upfront.
Permanent life insurance
Permanent life insurance policies typically accumulate a cash value. If you surrender a permanent policy, your insurer will give you the "surrender value", which is the cash value minus any surrender fees. In the first few years of the policy, the cash value will likely not be worth surrendering. You might also owe income tax on the amount you receive if it's more than you've paid in premiums.
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Frequently asked questions
Cancelling a term life insurance policy is relatively straightforward. One way to cancel is to simply stop paying premiums, which will trigger a grace period (typically lasting 30 days) before the policy lapses. You can also call or send a letter to your insurance company to notify them of the cancellation.
Cancelling a permanent life insurance policy is more complex than cancelling a term policy due to the accumulation of cash value. By cancelling, you may receive a payout from the cash value, but this may be reduced by surrender charges and taxes. It's important to understand the financial implications before proceeding.
Yes, there are alternatives to consider before cancelling your life insurance policy. For term policies, you may be able to reduce your coverage amount to lower premiums. For permanent policies, you can use the accumulated cash value to cover premiums or convert the policy to a reduced paid-up option with lower death benefits but no additional premiums required.
