If you own a life insurance policy that you no longer want or need, then you may want to just cancel it. But do you know how to cancel your life insurance policy?
The procedure for canceling your old policy is a multi-step process that can get complicated in some instances. And you need to think carefully before you do this, because canceling life insurance can have a big impact on your financial plan as well as the financial plans of your beneficiaries. But it can also be better than policy lapses.
How do I cancel my term life insurance policy?
Term life insurance is life insurance for a guaranteed period of time. When the term expires, so does the coverage amount.
You can always renew your term insurance policy for another term (at least up to a certain age), but you’ll pay higher life insurance rates this time because you’re older than you were when you initially took out the policy. This will always be the case unless you add a guaranteed renewable rider to your policy that will allow you to renew your current policy at the current premium level. (Of course, having this rider will also add to the initial cost of the policy and may raise your initial premiums to some extent.)
The procedure for cancellation of your term life insurance policy is fairly simple. Just notify your life insurance carrier that you no longer want the coverage and stop paying the premiums by the due date.
Once this is done, your coverage will terminate automatically at the end of the grace period. You can notify the insurance carrier either via telephone or by writing a letter.
In either case, you’ll need to give the insurance company your policy number, when you want the coverage to cease, and the address to which they can send any refund of premiums paid. The insurance provider may also have a form on their website that you have to submit in order to cancel the policy. This is all it takes to cancel term life insurance, and now you’re free to meet other financial obligations. Nonpayment of your premiums will always cancel any policy sooner or later, regardless of the policy type.
Why you may not want to cancel your term life policy
In any case, canceling a term policy is a relatively straightforward process. But canceling your policy may not be in your best interest in some instances.
For example, if you included a return of premium rider in your term life coverage, then the life insurance company may not refund you all of the premiums that you have paid. You may have to wait until the end of the term to collect this benefit.
If you have access to group life insurance, it will most likely terminate if you leave your employer. This type of policy is rarely portable. Insurance products that you buy as an individual will stay with you wherever you go.
Term life policies do not have a cash value component the way that permanent policies do, so if you cancel your term life insurance policy, chances are that you’ll get nothing in return. This is because this type of policy has no cash surrender value.
The only exception to this is with convertible term life insurance, where you can convert your term policy into a permanent life insurance. Then, you can cash in your permanent policy and collect any remaining cash value after all fees and expenses have been paid.
Can I cancel my whole life insurance policy?
If you are the policyholder of any type of permanent life insurance policy, such as a whole life insurance policy, universal life insurance policy, or variable universal life insurance policy, then you can cancel your policy at any time if you need to.
But if you have owned your policy for at least ten years, then you may be able to use your policy’s dividends or interest to cover the cost of your premiums. Then you won’t have to cancel your coverage.
When can I cancel my life insurance policy?
If you have just purchased your policy, then you can cancel your policy immediately without incurring any surrender charges or penalties. All life insurance policies and annuities offer this free-look period at no additional charge. The free-look provision can last for anywhere from 10 to 30 days, so don’t delay in notifying the insurance company if you decide that you don’t want the coverage after all.
Am I eligible for a refund of excess cash value?
Depending on the type of life insurance policy that you own, you may also get a check or deposit from the insurance company. It will be for the amount of cash value that accrued in the policy that exceeds the amount of all surrender charge fees and penalties.
However, in most cases you will have to have owned your policy for a certain amount of time before you will get any kind of refund from surrendering your policy. This is because the cash value builds up very slowly in the early years of the policy, and usually does not break even with the costs of the policy until at least seven to ten years have passed.
If you do get a refund of excess cash value from your policy surrender, you will most likely have to pay ordinary income tax on the excess amount. So surrendering your cash value life insurance policy can be a taxable event if the value of the policy is large enough.
The procedure for canceling your permanent life insurance policy is essentially the same as for cancelling a term policy. Just notify your insurance carrier that you want to cancel your coverage and then stop making premium payments. Give them your policy number, address or bank account information (if you want them to make a direct deposit) and the date that you want the coverage to end.
Reasons to cancel life insurance
If you want to cancel your life insurance policy just so you have more money to spend every month, you would be wise to think carefully about what you’re forfeiting in the long run. Of course, there are several legitimate reasons why you may not want or need your coverage anymore. These include:
1. You no longer need the coverage
If you took out a large life insurance policy years ago when your kids were still financially dependent on you, it may no longer be needed once they are grown and can provide for themselves. Or you may have accumulated enough in savings to negate the need for the death benefit.
2. You can’t afford to pay the life insurance premiums anymore
If you have retired and now have a much lower income than you did while you were still working, then you may want to surrender your policy and collect any remaining cash value.
3. You want to get a higher rate of return
Whole life policies typically pay fairly low interest rates for your money. If you want more than you are currently getting from your whole life or universal life policy, then consider cashing in your policy and investing in mutual funds or ETFs. (Of course, keep in mind that you can also lose money in these types of investments, depending upon how the markets and the investments perform over time.)
Things to review before canceling your life insurance policy
There are a few things that you need to consider before you cancel your life insurance policy. One thing you need to do before you do anything else is review your policy carefully to see what particular rules or stipulations will apply to your surrender. These rules can change as time passes.
For example, there could be particular stipulations that apply to the surrender of a new policy, or one that has only been in force for two years, while another set of rules apply to one that is 10 or 20 years old. Most cash value life insurance policies have back-end surrender fees that can last for as long as 10 or 15 years, so be sure to find out how much you will pay in surrender charges when you cash in your policy.
You should also confer with your policy’s beneficiaries before cashing in your policy so that your loved ones know that they will not be getting a death benefit when you’re gone. Also look at your estate plan to see what may happen if you don’t have a life insurance policy when you pass. If you are currently designating the policy to pay estate taxes, then it’s probably not a good idea to surrender it without making alternative arrangements first.
Alternatives to canceling life insurance
If you can no longer afford to pay the premiums for your policy, you don’t necessarily have to do a cash surrender to your insurance carrier. Here are some other alternatives that are available:
1. Reducing the amount of insurance
Your life insurance carrier may be willing to charge you lower premiums for a reduced amount of death benefit coverage. This can be a good choice if you still want some death benefit protection but can’t afford to pay your current premiums anymore.
2. Take out a policy loan
If you simply want to access the cash value in your policy, taking out a loan may be the most practical way to accomplish this. The loan will charge interest on the outstanding amount, but you don’t have to financially qualify for this type of loan because you’re essentially borrowing your own money.
3. Do a 1035 exchange
There are several other types of insurance vehicles that you can move your policy into without incurring any tax liability. Section 1035 of the Internal Revenue Code allows life insurance policies to be exchanged for the following types of insurance policies:
- Another cash value life policy
- Another cash value policy with accelerated death benefit riders that can be used to pay for expenses related to the insured’s disability or long-term care
- A tax-qualified long-term care insurance policy
- A nonqualified annuity contract (any type of annuity is permissible, including fixed, indexed and variable annuities)
- An annuity (again, fixed, indexed or variable) with a long-term care rider
- Make a cash withdrawal – Another way to access the cash value in your policy is to simply withdraw a certain amount of the cash value. Just be sure to leave enough cash value in the policy to keep it in force.
4. Get another medical exam
If your health has improved since you first took out your policy, such as from losing weight or quitting smoking, a new medical exam may lower your policy premiums because you qualify for an improved policy rating, such as from standard to preferred. You may also want to shop around and get some life insurance quotes from other insurers to see if you can get a better deal.
5. Add a non-forfeiture clause to your policy
A non-forfeiture clause will prevent your life insurance policy from lapsing if you become unable to pay the premiums for any reason. Of course, this rider comes at an additional cost, and using it can affect the amount of cash value in your policy. Check with your life insurance company for more information about this option.
6. Sell your policy
If you meet certain criteria: For example, if you’re at least 60-65 years of age and your life insurance has a death benefit of $50,000 or more, you may qualify to sell your life insurance. This can be done with a life settlement transaction (see below).
How do life insurance settlements work?
There is one more alternative that you have if you want to discontinue your life insurance coverage. If you meet the above criteria, you can probably sell your policy to a willing buyer such as a life settlement company. This may be the best option, because you will generally get three to four times the amount of cash value in your policy in a lump sum payment up front.
The procedure is simple and with today’s technology, it can span as little as 3-4 weeks. Here’s how it works:
- You will find a life settlement company and notify them that you want to sell your policy.
- You will fill out an application and produce all of your medical records.
- The settlement company will review all of your documentation to determine the current value of your policy.
- After they have completed their underwriting, the settlement company will come back to you with an offer to buy your policy.
- If you are satisfied with the amount of money that the settlement company is willing to pay, then you can sign off on the transaction.
- The settlement company will name itself as the new policy owner and beneficiary on the policy and assume the responsibility of paying the policy’s monthly premiums until you (the insured) die.
- The settlement company will collect the death benefit payout and thus recoup its premium outlay and also make a profit.
The rules pertaining to life settlements vary somewhat from one state to another. For example, the state tax laws for life settlements in New York may be very different from those in Texas or Florida. Be sure to take taxes into consideration when comparing this option to keeping your policy, because the policy’s death benefit will always be tax-free.
Get a free life insurance valuation
Selling your life insurance policy can have a drastic effect on your overall financial plan, so think carefully about all of the possible ramifications that will come with doing this.
Consult your financial advisor or insurance agent for more information on cashing in your policy and how it will affect you.
Want to see how much cash you could get for your life insurance policy? Find out instantly with our free life settlement calculator. You can also call Q Life Settlements at 866-679-9410, contact us here, make an appointment, or email us info@qcapital.com to discuss your situation. Our team is available and ready to explain to you all that you would want to know about life settlements.
Remember: Never abandon a life insurance policy without looking at the life settlement option first! You could be leaving money on the table that could be used to fund your retirement.
Author: Steven Shapiro
Steven Shapiro is the founder of the Company and also the President and CEO of Q Capital Strategies, LLC and Life Settlement Solutions LLC. Steven has been active in the life settlement industry for the last 18 years. In addition to his life settlement experience, Steven has expertise in strategic consulting, investment banking advisory services, and private equity investing. Steven holds a B.A. degree in economics from the University of Pennsylvania and an M.B.A. in finance and entrepreneurial management from The Wharton School of the University of Pennsylvania. Steven is also the immediate past Chair of LISA (having previously served as Chair), the Life Insurance Settlement Association, the oldest and largest trade organization in the life settlement industry.
