How to cancel your whole life insurance policy

It’s not as easy as canceling term life.

Logan Sachon

Logan Sachon

Published October 26, 2018

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There are many reasons people want to cancel a life insurance policy, but canceling a whole life insurance policy can be considerably more complicated than canceling a term policy.

Maybe you have a policy that your parents bought you that is too expensive, or maybe you’ve decided that it makes more sense to keep your retirement investments separate from your life insurance, and you want to switch over to a lower cost term life policy.

When you cancel your whole life insurance policy, you’re officially "surrendering" the policy in insurance lingo. But unlike term life, the cash value of whole life means you can't simply stop paying the premiums and assume the policy will end. What happens next — and your available options — will depend on the age of the policy, the insurer’s rules for handling missed payments, including their nonforfeiture clause, and the potential tax consequences.

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What to know before you cancel your whole life policy

If you’re canceling a whole life policy but you still need life insurance, you shouldn’t cancel your whole life policy until you have a new policy in force so that you don’t risk going without coverage.

While term life insurance is cheaper than whole life insurance, quotes are based on your current age and health profile, so it’s important to understand what kind of rates you’ll have for a new policy before canceling your old one.

Talk to an agent first (or compare free quotes) so you know what your options are before getting rid of your current life insurance protection.

How the age of your whole life policy affects how you cancel it

How long you’ve owned your whole life policy is the most important factor in what your options will be when you surrender it.

A quarter of whole life policies are terminated within the first three years, and nearly half are terminated within the first 10 years, so insurers like to make sure they recover their expenses if you bail on them. How they do this varies from policy to policy, but the general structure is this: the longer you’ve owned the policy, the easier it is to get the full cash value out of it.

  • Canceling whole life during the first two to three years that you own the policy
    The first few years of the policy make up a surrender period, which has different surrender rules than the rest of the policy’s lifespan.

Some insurers will stipulate that you don’t get any cash value portion returned if you surrender during this period, while other insurers will apply steep surrender penalties in order to recoup their own front-loaded expenses in selling and setting up the policy.

  • Canceling whole life during the first 10 to 20 years that you own the policy
    Insurers typically reduce the surrender fees by a yearly percentage over the first decade, meaning if your surrender penalty is 10% in year 1, it might be 9% in year 2, 1% in year 10, and 0% after that.

Talk to your insurer or read your policy to understand your surrender fees.


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Understanding your whole life policy’s nonforfeiture options

Another factor that could impact your options is something called nonforfeiture.

The easiest way to understand it is to compare it with term life insurance. With term life, if you stop paying your premium, the policy lapses, your coverage ends, and that’s that. With whole life, you’ve got more moving parts to work with, and if you’re past the surrender period and miss a payment then the insurer may offer you some alternatives (or even apply one by default):

  • You can take the full cash value and run, forfeiting future coverage or
  • You can keep the death benefit for a shorter term, or
  • You can opt for a “reduced paid-up option,” meaning you stop paying premiums and receive a reduced death benefit.

You may even be able to let the policy lie dormant for years and then resume paying premiums into it at some later date.

These nonforfeiture rules are really meant for policy owners who miss payments but still want to hang on to some part of the policy. If you’re simply trying to get rid of your whole life policy, they may not matter to you, but you can ask your agent or insurer about them just so you know all of your options.

Assessing your tax situation

Finally, there are taxes to consider. At a basic level, the cash value you get out of your whole life policy is tax-free, but there’s an exception. If the amount you receive is larger than the basis of the policy, you’ll be taxed on the amount over the basis. You can determine the basis by taking all the premiums you’ve paid into the policy and then subtracting any dividends you’ve been paid, any cash you’ve already withdrawn, and any agent commissions or administrative fees that were paid by your premiums.

Ways to access the cash value of your whole life policy without canceling

If you’re looking at canceling your whole life policy just to get at the cash value it contains, then you should know that there are more options available to you than simply surrendering the policy. Talk to a no-fee financial advisor for more information, but in general your options include:

  • Withdrawing cash from the cash value portion
    Doing this will likely reduce your death benefit, so be sure to talk to your agent or financial advisor first.

  • Taking out a loan against the cash value
    You’re essentially borrowing from yourself, but there’s still an interest rate to be aware of.

  • Selling the policy to a life settlement group This is typically only available to older policy owners who are expected to live another five to 10 years.

Although it’s definitely more complicated to cancel a whole life policy than it is to cancel a term life policy, it’s not impossible. Just take the time to review all of your options and understand the fine print.

Further reading

What does life insurance cover?

When will life insurance pay out, and when will it not? Learn what scenarios are covered by your policy.


What are life insurance premiums?

Premiums keep your policy in-force. Learn how they're determined and how you can lower them.


What are life insurance riders?

Customize your policy and get additional benefits and protection with must-have riders.


Why life insurance isn't an asset

Life insurance protects your family's financial future - but should you consider it an investment?


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.