Whole Life Insurance Cancellation: What To Expect And Prepare For

Cancelling a whole life insurance policy can be a big decision, and there are several factors to consider. Whole life insurance is designed to pay a death benefit and help with retirement investment, so it's a long-term commitment. Cancelling your policy may result in losing money, but there are valid reasons for doing so, such as high premiums, changing investment strategies, or no longer requiring coverage.

If you've recently purchased a policy, you're likely within the “free look” period, which typically lasts 10-30 days and allows you to cancel without financial penalty and receive a full refund. Cancelling outside of this period can be more complex, especially if the policy has accumulated cash value. You may be able to surrender the policy and receive its cash value, minus surrender fees, but these fees can be high in the early years of the policy.

Before cancelling, it's worth considering alternatives, such as reducing coverage, withdrawing or borrowing from the cash value, requesting a new medical exam, or shopping around for a new policy with more competitive rates.

You may not get your money back

When it comes to cancelling a whole life insurance policy, you may not get your money back. This is because insurers have protections in place to ensure they don't lose money on your policy. One such protection is surrender penalties, which you don't have to worry about with term insurance.

Under the surrender rules of most insurance companies, if you cancel your coverage within the first few years of buying it, you're considered to be "surrendering" coverage. In that case, you either won't get back any of the cash value of your policy or will pay a significant surrender charge.

The surrender period, where you lose the full cash value of the policy or lose a lot of it to fees, is typically the first two or three years of coverage. If your policy charges surrender fees, these will go down as you maintain coverage for longer. Your policy may be structured so you pay a 10% surrender fee in year one, a 9% fee in year two, and so on.

Eventually, you'll have had the policy long enough – usually for about 10 years – and you won't have to pay any surrender fee if you've decided to cancel coverage. But it can take a long time to get to the point where you can cash out without a big penalty.

If you cancel a term life insurance policy, you won't get a payout. However, if you cancel in the middle of your payment cycle, you might get a small refund for any unused portion of your premium.

You can cancel within the free look period

Cancelling your whole life insurance policy within the "free look" period is a good option if you have buyer's remorse. The free look period typically lasts 10 to 30 days from receiving the policy, during which you can terminate it without penalty and receive a full refund. This period gives you a risk-free opportunity to reconsider your decision. To cancel, simply call your agent or insurer and follow their steps.

If you've had your policy for longer than the free look period, you may still be able to cancel it, but there may be financial penalties involved. For example, if you have a newer whole life insurance policy with little to no cash value, you may have to pay surrender fees. These fees can eat into a large portion of the cash surrender value you'd receive. On the other hand, if you have an older policy with considerable cash value, you may be able to surrender the policy and receive the cash value minus any surrender fees.

Before cancelling your whole life insurance policy, consider the alternatives. You may be able to reduce your coverage amount, withdraw or borrow from your cash value, ask for a new medical exam, or get a new life insurance policy with more competitive rates. Cancelling your policy may result in a loss of coverage and benefits, so it's important to carefully consider your options before making a decision.

You can surrender the policy for its cash value

If you're over 65 and have a permanent life insurance policy, you can surrender the policy for its cash value. This is a good option if you no longer need life insurance coverage, can't afford to pay premiums, have paid off your debts, or want to change your investment strategy.

When you surrender a permanent life insurance policy, you may be able to get the policy's cash value minus surrender fees. The amount of money you'll receive will depend on how long you've had the policy, as the cash value component builds over time. For example, if you've had the policy for a few years, you may have to pay a surrender fee of around 10% in the first year and 9% in the second year. After that, the surrender fees will decrease each year until you've had the policy for about 10 years, at which point you won't have to pay any surrender fee.

Before surrendering your policy, consider the following:

• Surrender or cancellation fees: Newer whole life insurance policies may have high surrender fees that can eat into a large portion of the cash surrender value you'd receive. You may need to do a cost-benefit analysis to determine if the fees are worth it.
• Your beneficiaries: Carefully consider all your beneficiaries before terminating a life insurance policy. For example, your children may have grown up, but your spouse may still depend on your income or pension.
• Your overall estate plan: Consider your estate plan and whether your life insurance policy can be repurposed. For example, instead of leaving a cash lump sum to a charity in your will, you can name the charity as your beneficiary so they receive the payout when you pass away.

You can exchange it for another policy or annuity

If you're over 65 and have a permanent life insurance policy, you can exchange it for another policy or annuity tax-free. This is known as a "1035 exchange".

With a 1035 exchange, you can swap your life insurance policy for a similar insurance product, such as an annuity or long-term care insurance, without paying taxes. This option may be useful if the reasons you bought the original policy are no longer valid, or if the features and benefits of newer policies align better with your current needs.

It's important to work with a qualified life insurance advisor to ensure the exchange is done correctly and to avoid any tax implications.

You can sell your policy

Selling a life insurance policy to a third party is known as a life settlement. The amount you receive can sometimes be more than the cash surrender value of insurance, which is the amount you'd get if you surrendered a permanent life insurance policy before you died or the policy matured. However, it's usually much smaller than the policy's death benefit.

A viatical settlement is similar to a life settlement, but it involves someone with a terminal illness selling their life insurance policy to a third party. Typically, the payout is substantially higher because the person's shortened life expectancy means the buyer will spend less on premiums and receive the death benefit sooner.

• Find a broker or settlement company: The policyholder shares information about their life insurance policy and health with interested brokers or settlement companies to determine if their policy is sellable.
• Make the sale: The buyer pays the policyholder a lump sum. The policyholder is absolved of all costs related to the account, and the buyer makes the premium payments on their behalf.
• Change the beneficiary: When the policyholder dies, the death benefit goes to the buyer instead of the originally listed beneficiaries.

A policyholder will typically receive between 10% to 25% of their policy's death benefit in a life settlement, or 50% to 85% of their policy's face value in a viatical settlement. If you have a policy with a $100,000 death benefit, you could receive as little as $10,000 on a life settlement. But if you've been diagnosed with a terminal illness, you could receive $50,000 or more through a viatical settlement.

There are several factors that influence how much a person might get from a life insurance settlement:

• Age: Brokers typically like to work with policyholders who are at least 65 years old, as they are likely to die sooner than younger individuals.
• Health: Individuals in poor health usually receive more money than individuals in good health.
• Death benefit: Buyers usually require policyholders hoping to sell a life insurance policy to have a death benefit of at least $100,000 to interest buyers.
• Financial security of the insurer: Buyers will pay more for insurance policies underwritten by companies with stronger financial strength ratings.

If you plan to cash out your life insurance policy, take the following steps:

• Gather important documents: Buyers will want information on the life insurance policy and the policyholder's medical records to decide if they're interested in working with them.
• Look for reputable brokers and settlement companies: Interview more than one broker. Learn about whether the company is licensed in your state, how its commission structure works, and whether there are any other costs. If you're working with a life settlement company, research the company thoroughly.
• Compare multiple offers: Speak with multiple brokers and settlement companies before agreeing to a deal.

Frequently asked questions