How to Cancel Your Life Insurance Policy

Canceling your life insurance policy can typically be done in two simple steps: informing your insurer and stopping payments. However, this can change depending on the type of life insurance you’re trying to cancel. Terminating a term life policy is easier than canceling a whole life policy, and the latter may involve cancellation fees.

• How Do You Cancel Your Life Insurance Policy?
• Reasons to Cancel Your Life Insurance Policy
• Alternatives to Canceling Your Life Insurance Policy
• How to Cancel Your Life Insurance Policy FAQ

Generally, the process of canceling your life insurance is simple — all you need to do is inform your insurer and stop your payments. This can be done at any point during your contract.

If you cancel your policy within its free look period, you can get your money back in full. This period can last anywhere from a week to a month or more, depending on the insurer and regulations of your state. Prior to purchasing any life insurance policy, you can reach out to the provider to ask about the length of their free look period.

However, what follows depends on whether you’re canceling a term life or whole life policy and when you cancel it.

Canceling a term life insurance policy is easy and can be done in three ways.

1. Stop paying your premium: You can simply let your premium lapse by not paying your insurer. After your policy’s grace period, which typically lasts 30 to 31 days after your previous payment date, your policy will be terminated.
2. Send a letter to your insurer: Sending a written notice is a quick and easy way to let your insurer know you want your policy to be canceled. You can simply say something like:

   Dear [insert insurer’s name here],

   I am writing to inform you that I would like my policy, with the policy number [insert number here], to be canceled, effective [insert date here].

   Please return unused premiums to my address at [insert address here].

   Sincerely,
   [Your name]

   Aside from sending a letter, your insurer may also have a form you can fill out on their website.

3. Inform your insurer over the phone: Some insurers may have a hotline for canceling policies, where they can start the process or cancel it on the spot. You can find this on their website.

With term life insurance, there are often no penalties or fees for canceling your coverage.

The process of canceling a whole life insurance policy can be complex, as it includes a cash value component. Unlike a term life policy, whole life policies include a nonforfeiture clause. The policy stipulates that you can receive full or partial benefits or a partial refund of your premiums after nonpayment. What you can receive depends on your insurer.

1. Surrender or cash out your policy: Whole life policies have a cash value component. If you take this out during your policy’s surrender period, which is a few years after your policy’s inception, you may have to pay steep surrender fees or not receive any cash value.
   Conversely, if you take out your cash value after your surrender period, you will likely receive some of your funds but may still need to pay a surrender fee. Once you take out your cash value, your policy will be considered terminated.
2. Sell your insurance: An insurance policy is an asset, which means you can sell it off like other assets. Do some research and contact a reputable broker. Once you sell your policy, the third party will receive the death benefit upon your passing.
3. Let it expire: Some insurers automatically terminate and cash out your policy if you stop making payments, while some use your cash value to fund premiums until there is nothing left. However, both avenues are still subject to surrender fees and taxes.
4. Choose a reduced paid-up option: Some insurers allow you to stop payments and keep the policy in exchange for a lower death benefit. However, this will depend on the premiums you’ve paid. Contact your insurer to ask if they offer this option.

Keep in mind that at the end of the day, what you can receive depends on your insurer.

The cash surrender value is how much you get minus any fees owed after canceling your whole life insurance policy.

• How to calculate a cash surrender value: The cash surrender value is calculated based on the fees, which vary based on the insurer and taxes.
• Will you pay taxes for a cash surrender value? You might get taxed if your cash surrender amount is higher than what you’ve paid into your cash value. Contact a tax professional or your agent to see what surrender charges you might face.

A nonforfeiture clause stipulates how much you can receive if your premiums lapse due to nonpayment, which often applies under whole life insurance policies. Depending on the insurer, you can potentially receive any of the following:

• The full benefit
• A reduced benefit based on your premiums paid
• A partial refund of your total paid premiums
• The cash surrender value

Keep in mind that this depends on your insurer and might even be established upon application. Contact your insurer to ask which one applies to you.

There are two periods to keep in mind if you want to cancel your life insurance policy: during and after the surrender period. The surrender period is the time you must wait to withdraw your policy's cash value without fees or penalties. How long this lasts depends on your insurer.

• During the surrender period: If you attempt to cancel your policy and withdraw your funds before your surrender period is over, your insurer may refuse to give you the cash value or give you severe penalties.
• After the surrender period: Once the surrender period has passed, you can safely withdraw your cash value and cancel your policies while paying the surrender fees listed in your agreement.

The time when you cancel a whole life insurance policy plays a role in whether or not you can receive your money back. Conversely, if you have term life insurance, you can cancel at any time, which is something to keep in mind when you’re applying.

If the life insurance policy cancellation rules are too complex and you want a straightforward solution, you can simply choose to sell it or undergo a tax-free exchange.

While selling is straightforward, a tax-free exchange or 1035 exchange lets you trade your life insurance for another product of similar value without any tax implications.

There are a few reasons to cancel a life insurance policy, but it’s important to think it through beforehand.

Prior to canceling life insurance, it’s important to go over your reasons and think long-term. After all, depending on the insurer, you may end up with less than you invested.

Canceling a life insurance policy comes with few guarantees that you will get your money back. However, there are exceptions:

• When you cancel during the free look period: All policies come with a free look period, which is a timeframe at the beginning of your policy when you can change your mind and get your money refunded completely. How long this free look period is will depend on the insurer and the state.
• When you are in the middle of a billing cycle: If your free look period has ended and you decide to cancel in the middle of a billing cycle, an insurer might only refund your premiums for the time between your cancellation date and your next payment date. All other premiums will not be refunded.

Keep in mind that cancellation rules can vary from insurer to insurer. Prior to applying, make sure to ask your agent what the rules are for cancellation and the likelihood of you getting your money back.

If you aren’t too sure about whether you want to cancel your life insurance policy or not, know that you have alternatives. Exploring these alternatives can help you decide what’s best for you.

If the premiums are the reason you want to cancel your life insurance policy, it’s possible to reduce them. You can contact your insurer to ask whether you can decrease or customize your coverage to fit your financial situation — either as a permanent change or a temporary one.

If you are just in dire need of cash, it’s possible to take out a tax-free loan from your policy if you have already made a certain number of payments. However, keep in mind that if it is not repaid, your loan amount will be taken against your original benefit.

Your physical health plays a role in your premiums, and if you weren’t in good health at the time of application but are now, a new medical exam may help reduce your premiums. For instance, if you’ve stopped smoking for a few years, you may be qualified for lower premiums.

Getting a new, lower-cost policy with a lower benefit may be a better alternative to canceling your policy and not having life insurance. Consult your broker to review and compare quotes from different companies.

If you’ve had your policy for a few years and you’re an older policyholder, you might want to consider selling your policy if you’re in need of cash. However, keep in mind that finding a broker or life settlement company that will give you a good deal can be challenging.

Whichever avenue you choose, it’s important to do thorough research and deliberate about the best option.

Understanding how to cancel a life insurance policy can be challenging. Learn more about canceling life insurance by reviewing our answers to some of the most frequently asked questions about it.