You took the medical exam, you’ve dutifully paid your premiums, and now you want out — why some people cancel their life insurance, plus how to do it.
There are many reasons that you may want to cancel your life insurance policy. Some make good sense (like paying off your loans early and no longer needing a policy to cover them) and some don’t (like wanting to spend your monthly premium payments on a monthly spa day instead). The considerations are different whether you have term life insurance or whole life insurance — and the steps to cancel are different, too.
If you’re thinking about canceling your life insurance policy, we’ll go over the risks, and walk you through how to do it.
Read on to find out:
Just like term life and whole life insurance are two different beasts, the motivations for canceling are also different.
Just like buying life insurance is a personal decision, deciding to cancel your policy is personal, too.
If you’re thinking about canceling, revisit the reasons that you decided to buy life insurance in the first place. If your situation hasn’t changed drastically from when you first bought your life insurance policy, it probably doesn’t make sense to cancel it. (One exception: If you want to cancel because you’ve found a better rate, you should wait until the new policy with the new rate is active before you cancel your old policy — if you cancel before your new policy is signed, you risk not being covered at all.)
If your situation has changed and you still want to cancel, there are few things you should consider before you cancelling your life insurance:
After considering these facts, it still might make sense for you to drop your policy — but it’s not something to be taken lightly.
If you immediately regret your life insurance purchase, you may be able to cancel it without penalty or cost if you’re still within the free look period.
The free look period is mandated by state and can be between 10 to 30 days, so check your policy or ask your insurer how long your free-look period is. If you cancel during the free look period, any premiums you have paid will be fully refunded.
Canceling your life insurance policy is different depending on if you have a term life insurance or whole life insurance.
Canceling your term life insurance policy is as easy as stopping payments. Don’t pay your premium within the defined grace period — the mandatory period set by your policy during which you can pay your premium without canceling your coverage — and your insurance is canceled. That’s usually a bad thing, but if you want to cancel your term life insurance policy, it’s that easy: just don’t pay.
You won’t get refunded, and your family will no longer get a death benefit if you die, but you’ll also no longer owe premiums.
Canceling a whole life insurance policy is more complicated that just stopping payments. Each policy has slightly different forfeiture rules, but generally, canceling whole life insurance starts with a call to your insurer. What happens after that will depend on how long you’ve owned the policy and your insurer’s rules, but there are three general options:
Cash out the policy One of the appeals of whole life insurance is that it has a cash value. The first few years of your whole life policy are the “surrender period” (the exact time length will be set in your policy). If you cancel during this period, there will be fees and penalties and there may be no cash value to redeem. If you cancel within the first 10-20 years (again, check your policy), the cash value of your policy may be subject to high fees from your insurance company. And while a life insurance death benefit isn’t taxable income, cash value from a policy that you cancel is taxable.
Reduced paid-up option Some insurers will offer a reduced paid-up option, which keeps allows you to stop paying premiums and keep a reduced death benefit.
Let it lapse If you stop making payments, some insurers will automatically cash out your policy; others will let the policy lapse, in which case you may be able to reinstate it within a set period. You’ll likely have to pay back premiums and go through underwriting again, but the cost could be less than buying a new policy.
Learn more about canceling your whole life insurance policy.
If you want to cancel because your premiums are too high right now or because your health changed, there may be a way to change the terms of your policy without cancelling, depending on the type of policy you have.
Before you cancel your term life insurance policy, it’s worth considering your alternatives:
There are a few alternatives to canceling a whole a life insurance policy:
Disclaimer: Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.