How to cancel your whole life insurance policy

You can cancel a whole life insurance policy, but canceling too early can result in a charge or lower cash surrender value.

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People regularly cancel or change their life insurance coverage, 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 simply stop paying premiums and assume the policy will end.

To cancel coverage, start by calling your insurance provider. Your options will depend on the age of your policy, your insurer’s rules for handling missed payments, and any potential taxes.

Key Takeaways

  • When you cancel your whole life insurance coverage, you keep the cash surrender value of the policy.

  • You’ll pay high fees and are unlikely to get any money back if you cancel within the first few 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 cash you get to 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 first few years of your policy are considered the surrender period, which 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 this period. Most insurers also charge steep surrender fees during this time to recoup their own 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 by a yearly percentage 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 after many years of maintaining a whole life insurance policy, the cash surrender value will be lower than the cash value amount. Your cash surrender value is your current cash value minus the fees associated with managing 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 larger 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 adding together the premiums you’ve paid and 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?

Nonforfeiture is a feature of whole life insurance that gives you options if you want to stop paying your premiums. With term life, if you stop paying your premiums, the policy lapses and your coverage ends, and that’s that.

With whole life, if you’re past the surrender period and miss a payment, the insurer may offer you some alternatives or even apply one by default:

  • 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, just with a reduced death benefit.

If you’ve built up enough cash value, you may be able to let the policy lie dormant for years while your cash value pays your premiums, then resume payments later.

These nonforfeiture rules are really meant for policy owners who miss payments but still want to hang on to some part of their policy. But even if your intention is 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 like 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 only available to older policy owners who are only expected to live another 5 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.

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.

What happens when 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.