How to Cancel Your Life Insurance Policy


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ByMark Fitzpatrick
Edited byRae Osborn
ByMark Fitzpatrick
Edited byRae Osborn

Updated: June 14, 2024

Advertising & Editorial Disclosure

Canceling term life insurance is simple; just stop paying your premium and notify your insurer by letter or phone. Additionally, check your insurer's website for a possible termination form you can complete online. Canceling whole life insurance entails considering additional factors, such as the policy's cash value. Initiating whole life insurance cancellation might lead to cancellation fees or other financial implications.

Before proceeding, it's essential you understand the life insurance policy cancellation rules and any potential repercussions. Determining the reasons for canceling your life insurance policy and consulting a financial advisor, if necessary, can also ensure a well-informed decision.

Key Takeaways

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Cancel a life insurance policy during the free look period to get a refund. The free look period lasts for a short time after you apply for life insurance, during which you are guaranteed a full refund if you change your mind.

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You can cancel your life insurance at any time with restrictions. Canceling life insurance may involve surrender fees or only a partial return of your money.

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Canceling a term life insurance policy is easier than canceling a whole life insurance policy. Term life insurance requires informing your insurer and stopping payments, while whole life insurance is more complex and involves the policy’s cash value.

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Canceling Your Life Insurance Policy

Canceling term life insurance is straightforward — you simply inform your insurer and stop your payments. You can do so at any point during your contract.

If you cancel your life insurance 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 in your state. Before purchasing any life insurance policy, you can ask the provider about the length of their free look period.

The steps that follow will depend on whether you are canceling term life insurance or whole life policy and when you decide to cancel. Familiarizing yourself with the life insurance policy cancellation rules is essential, as these rules outline the process and any potential consequences, such as refunds or charges for canceling life insurance.

How to Cancel a Term Life Insurance Policy

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

1. Stop paying your premiums

You can simply let your policy lapse by not paying your insurer. Your policy will be terminated after your policy’s grace period, which typically lasts 30 to 31 days after your previous payment date.

2. Send a letter to your insurer

Sending a written notice or life insurance cancellation letter is a quick and easy way to let your insurer know you want your policy to be canceled. Here is an example of what you can say:

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]

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 specifically for canceling life insurance, where they can start the life insurance cancellation process or complete it immediately. You can find this on their website.

When canceling term life insurance, there are often no penalties or fees associated with discontinuing your coverage.

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WHAT IS A CASH SURRENDER VALUE?

The cash surrender value is how much money you receive after canceling whole life insurance.

  • How to calculate a cash surrender value: The cash surrender value is calculated by subtracting surrender fees from your remaining cash value. Fees vary based on the insurer and how long you've had your policy.
  • Will you pay taxes for a cash surrender value? You might get taxed if your cash surrender amount exceeds what you’ve paid into your cash value. Contact a tax professional or your agent to see what surrender charges you might face when canceling a life insurance policy with cash value.

How to Cancel a Permanent Life Insurance Policy

Canceling a permanent life insurance policy, including whole and universal life, 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 withdraw it 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. 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. Your policy will be terminated once you take out your cash value.

2. Sell your insurance

An insurance policy is an asset, which means you can sell it off like other assets. If the life insurance policy cancellation rules are too complex and you want a straightforward solution, you can sell it or undergo a tax-free exchange. Do some research and contact a reputable broker. Once you sell your policy, the third party will receive the death benefit upon your passing. 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.

3. Let it expire

Some insurers automatically terminate and cash out your policy if you stop making payments. Others 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.

Remember that the exact process and what you can receive depend on your insurer's policies and the life insurance policy cancellation rules they adhere to.

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WHAT IS A NONFORFEITURE IN A WHOLE LIFE INSURANCE POLICY?

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

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

When You Should Cancel Your Whole or Universal Life Insurance Policy

The outcome of surrendering your life insurance policy will depend on whether you do so during or after the surrender period. The surrender period is the amount of 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 life insurance policy and withdraw your funds before your surrender period ends, your insurer may refuse to give you the cash value or impose severe penalties.

  • After the surrender period: Once the surrender period has passed, you can safely withdraw your cash value and cancel the life insurance policy without being subject to a penalty.

The timing of when you cancel a whole life insurance policy determines whether or not you can receive your money back. Canceling term life insurance offers more flexibility, allowing for cancellation at any time without financial repercussions.

Reasons to Cancel Your Life Insurance Policy

There are various good reasons to cancel life insurance, such as affordability concerns, finding more suitable coverage, changes in life goals and needs or shifting to more aggressive investing strategies.

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    You can’t afford the premiums

    If the monthly premiums are making it difficult to manage your finances, it might be time to downgrade your policy benefits in exchange for a lower premium or cancel the life insurance policy entirely.

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    You want to collect the cash value portion of your policy

    If you need funds, whether it’s for an emergency or retirement, and don't have any other options, canceling your life insurance and withdrawing the cash value may be an option to consider.

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    You found a better option elsewhere

    If you’ve undergone a lifestyle change and stopped smoking, or if you’ve simply gone shopping for a new policy, you may consider canceling your life insurance with one provider to get a new one with another provider.

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    You no longer need the policy

    If you got your life insurance for a specific purpose, such as to help pay off debts in case of your passing or for your dependents, and that purpose is no longer relevant, then you may consider canceling your policy.

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    You choose aggressive investing

    If you want to opt for more aggressive investments and get started with your funds, canceling your policy and redirecting the funds into investments might be an option to consider.

Before canceling life insurance, it’s important to consider your main reason to cancel your life insurance policy and think long-term. After all, depending on the insurer, you may end up with less than you invested.

MONEYGEEK EXPERT TIP

Be careful when canceling your life insurance policy because you will most likely pay a higher premium if you want to apply for a new one.

Getting Your Money Back if You Cancel Your Life Insurance Policy

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 the life insurance policy in the middle of a billing cycle, an insurer might only offer a pro-rated refund of your premium for the time between your cancellation date and your next payment date. The insurer will not refund any other premiums.

Remember that life insurance policy cancellation rules can vary from insurer to insurer. Before applying, ask your agent what the rules are for cancellation and the likelihood of you getting your money back.

What to Consider Before You Cancel a Life Insurance Policy

Make sure you understand the immediate and long-term implications of canceling your life insurance policy. Before proceeding with life insurance cancellation, consider the following key factors.

1
Surrender Charges and Fees

When canceling whole life insurance, be aware of surrender charges or fees, which can be substantial, particularly with newer policies. These fees are often deducted from the cash value you receive.

2
Cash Value of the Policy

Whole life insurance policies accumulate cash value over time, representing the amount you've paid minus any charges. If you cancel whole life insurance, the insurance company typically sends a check for this cash value within 30 days. However, the refund may be less than the total premiums paid due to policy administration costs and cancellation fees.

3
Refund Policies

The possibility of a refund depends on the type of insurance policy. Term life insurance policies, which do not build cash value, generally do not offer refunds upon cancellation. In contrast, permanent life insurance policies may offer a refund of premiums paid minus fees.

4
Financial Needs and Circumstances

Your current financial situation is an important factor. If the death benefit of your life insurance policy is critical for your financial security or your dependents, consider alternatives to life insurance cancellation, such as selling the policy for a lump sum.

5
Impact on Beneficiaries

Carefully consider the implications of life insurance cancellation for your beneficiaries. If dependents still rely on your income or pension, terminating the policy could leave them vulnerable. Assess the needs of all beneficiaries before making a final decision.

6
Overall Estate Plan

Your life insurance policy may be key to your broader estate plan. Consider if the policy could be repurposed rather than canceled. For example, naming a charity as a beneficiary might align better with your estate planning goals than a cash lump sum distribution.

7
Potential for Policy Sale

Selling your life insurance policy, known as a life settlement, might be a viable option. This can allow you to recover some premiums paid. It's advisable to consult a reputable broker to explore this option and understand the process and potential financial return.

Alternatives to Canceling Your Life Insurance Policy

If you aren’t 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.

1
Lower or Reduce Your Coverage

If the premiums are why you want to cancel your policy, it may be 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.

2
Borrow From Your Policy

If you need 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, remember that your loan amount will be taken from your original benefit if it is not repaid.

3
Request a New Medical Exam

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.

4
Shop for a New Policy

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.

5
Consider Life Settlement

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

FAQ: How to Cancel Your Life Insurance Policy

Learn more about canceling life insurance by reviewing our answers to some of the most frequently asked questions.

Can you cancel life insurance?
Can you cancel term life insurance?
How do you cancel whole life insurance?
Can I cancel a life insurance policy someone has on me?
What happens if you stop paying life insurance premiums?
Can I exchange my life insurance policy for an annuity?
Can your insurance company cancel your life insurance policy?
Can my beneficiaries take over my premium payments?
If I cancel my life insurance, do I get my money back?
When should you stop life insurance?
What happens when you cancel a life insurance policy?
What if I change my mind about canceling my policy?
Can you get money back from a lapsed life insurance policy?

About Mark Fitzpatrick


Mark Fitzpatrick headshot

Mark Fitzpatrick has analyzed the property and casualty insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. Currently, he leads P&C insurance content production at MoneyGeek. Fitzpatrick has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.

Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.


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