You can cancel your life insurance policy whenever you want, but there are more factors to consider when canceling a whole life insurance policy than when canceling a term life insurance policy. The cash value of whole insurance means you can't just stop paying premiums and assume the policy will end.
To cancel your life insurance coverage, start by calling your insurance company. Your options will depend on how long you’ve had your policy, how your insurer handles missed payments, and your cash value amount.
You keep the cash surrender value of the policy, minus fees, when you cancel whole life insurance.
You’ll pay high penalties and are unlikely to get any money back if you cancel within the first 10 years of owning a whole life policy.
The cash you receive is untaxed unless it exceeds the amount you paid towards your cash value.
When can you cancel a whole life insurance policy?
You can cancel a whole life insurance policy at any time, but you’ll face penalties if you cancel during the first 10 years of your coverage. The penalty amount and how much of your cash value you keep depends on how long you’ve owned your whole life policy and the cash value amount you’ve accumulated.
Canceling during the surrender period
The surrender period covers the first few years of your policy and has different cancellation rules than the rest of the policy’s lifespan.
Some insurers won’t return any cash value amount if you surrender your policy during the surrender period. Most insurers also charge steep surrender fees during this time to recoup their expenses from selling and setting up the life insurance policy.
Canceling after the surrender period
After the surrender period, it’s more likely that you’ll keep some of your cash value earnings, but you could still pay surrender charges.
Insurers typically reduce the surrender fee once a year over the first decade the policy is active, meaning if your surrender penalty is equal to 10% of your annual premium in year one, it might be 9% in year two, down to 1% in year 10, and 0% after that. Surrender fees are listed in your policy contract.
What is the cash surrender value?
When you cancel your whole life policy and take the cash value, the amount you walk away with is called the cash surrender value. Generally, the longer you’ve owned the policy, the higher its cash surrender value.
How to calculate the cash surrender value
Even if you cancel several years into your whole life insurance policy, its cash surrender value will be lower than its cash value amount. Your cash surrender value is your current cash value minus any fees associated with maintaining your policy.
Your insurance agent can share the exact fees for your policy and help you calculate the cash surrender value.
Is the cash surrender value taxable?
If the cash surrender amount you receive is higher than the cost basis of the policy, you’ll be taxed on the amount over the cost basis.
The cost basis is how much you’ve paid into the cash value through your premiums. You or your insurer can calculate your policy’s cost basis by calculating how much you’ve paid into your cash value, then subtracting:
Agent commissions or administrative fees covered by your premiums
Cash you’ve already withdrawn from the account
Dividends paid to you by your insurance company
Talk to a tax professional for clarification on how taxes will affect your specific situation.
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What happens if you stop paying whole life insurance premiums?
With a term life insurance policy, if you stop paying your premiums, the policy lapses and your life insurance coverage ends, and that’s that. If you stop paying your whole life premiums, your insurer will offer you nonforfeiture options or apply one by default.
Nonforfeiture options allow you to stop paying premiums but still get some value out of your policy. Common nonforfeiture options are:
Cancel the policy and cash out. You take the cash surrender value and forfeit future coverage. This option is often applied by default.
Keep the death benefit for a shorter term. Your cash value goes toward buying a term life policy with the same death benefit. Also known as extended term life insurance, this means you’ll lose coverage when your term ends.
Take a reduced paid-up option. You no longer owe premiums and you keep your whole life insurance policy, but with a reduced death benefit.
These nonforfeiture rules are mainly meant for policy owners who miss payments but still want to hang on to some part of their policy. But even if you plan to cancel your insurance policy entirely, it’s still worth asking your insurer about nonforfeiture to understand all of your options.
Alternatives to canceling whole life insurance
If your main reason for canceling your whole life insurance is the high premiums, lowering your death benefit or choosing a nonforfeiture option are the least complicated ways to reduce your costs.
If you want to cancel your policy to access your cash value there are ways to do so without giving up your coverage, but they all come with caveats.
Withdraw from the cash value amount. Doing this can reduce your death benefit and insurers often treat it as a loan.
Take a loan against the cash value. You’re essentially borrowing from yourself, but your insurer will still charge interest. Your policy can lapse if you fail to pay it back.
Sell the policy to a life settlement group. The option to sell your policy is typically available to older policy owners who are expected to live another five to 10 years.
Take the time to review all of your options carefully. Life insurance loans and life settlements are rarely the best way for most people to get extra cash.
You have more choices — and therefore more variables to consider — when you want to cancel whole life insurance. Begin the process by contacting your insurance company or broker so that a licensed professional can help you make the right decision.
Frequently asked questions
Do you get money back if you cancel whole life insurance?
You can get money from your policy’s cash value. The amount of money you get depends on how much cash value has accrued, when you surrender the policy, surrender fees, and taxes.
What happens if you surrender a whole life insurance policy?
When you surrender a whole life insurance policy, your insurance protection ends and you may get some cash back from the policy’s cash value.
How do I cancel my whole life insurance policy?
You can cancel your whole life insurance policy by contacting your insurer. From there, you will be able to explore options to surrender your policy and get money from the cash value.