Everything you need to know about canceling a whole life insurance policy, from how and when to do it to calculating your cash surrender value.
Updated March 23, 2021|6 min read
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There are many reasons you might want to cancel a life insurance policy. Maybe you bought a policy that is too expensive now, 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 insurance policy.
When you call your insurance provider to cancel your whole life insurance policy, you’re officially surrendering the policy. But unlike term insurance, the cash value of whole insurance means you can't simply stop paying the policy’s premiums and assume the policy will end.
Your options when canceling whole life insurance 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.
When you cancel your whole life insurance coverage, you keep the cash surrender value of the policy
But if you cancel within the first few years of owning the policy, you’ll have to pay fees and you might not get any money back
The cash you receive is untaxed, unless it exceeds the amount you paid towards your cash value
With term life insurance, you pay a monthly premium to keep the policy active. If you die while the policy is active, your beneficiaries get the death benefit, which is the insurance payout. But the key with term life is that you set a policy length — typically 10, 20, or 30 years — and then once the term is over, the policy expires.
Whole life insurance is different. It’s a type of permanent life insurance, so it stays active for your entire life as long as you keep paying your premiums. But it’s a little more complicated than term life: Whole life is made up of both the death benefit and the cash value, which is used as an investment — similar to a retirement account.
Whole life insurance is typically five to 15 times more expensive than term life, and most financial experts recommend term life for the average consumer. But whole life insurance is good for some people — if their assets will be subject to the estate tax after their death, for example.
Canceling your whole life policy starts with a call to your insurance provider. The next steps will depend on how long you’ve owned your whole life policy. Due to its high cost, 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 can recover their expenses if you cancel.
How they do this varies from policy to policy, but generally, the longer you’ve owned the policy, the more cash value you will get from it. Here’s what you should know if you want to cancel your policy and cash out…
The first few years of the policy are considered the surrender period, which has different 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, while other insurers will apply steep penalties in order to recoup their own expenses from selling and setting up the policy.
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, then down to 1% in year 10, and 0% after that. The surrender fees of your policy should be listed in your policy documents, but you can also contact your insurer.
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How much money you get back from your whole life policy depends on how long you’ve had the policy when you cancel it. As explained above, if you cancel your whole life policy during the surrender period, you may not get any cash value at all.
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 determined by subtracting the fees associated with managing your policy from the current cash value. But, the longer your policy has been active, the greater the cash surrender value will be.
You can review your policy documents or consult with your insurer to calculate the cash surrender value.
A big chunk of the cash surrender value of your whole life policy is tax-free, but some of it is subject to taxes. If the 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 the amount you’ve contributed to the cash value through your premiums. Any money the cash value has accrued beyond the basis will be taxed.
You can determine your policy’s cost basis by adding together 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.
Be sure to talk to a tax professional for clarification on how taxes will affect your specific situation.
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Nonforfeiture is a feature of whole life insurance that gives you options if you want to stop paying your premiums. The easiest way to understand nonforfeiture is to compare it to term life insurance. With term life, if you stop paying your premiums, the policy lapses and your coverage ends, and that’s that.
With whole life, there are more moving parts, and 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. Assuming you’re past the surrender period, you can cancel the policy and take the cash surrender value, forfeiting future coverage.
Keep the death benefit for a shorter term. You can keep the death benefit from your whole life insurance policy for a certain amount of time, similar to a term life policy.
Take a reduced paid-up option. In this scenario, you will stop paying your premiums and keep the whole life insurance policy with a reduced death benefit.
If you’ve built up enough cash value, you may even be able to let the policy lie dormant for years while the cash value pays for your premiums and then resume paying premiums into the policy at a later date.
These nonforfeiture rules are really meant for policy owners who miss payments but still want to hang on to some part of their policy. If you’re simply trying to get rid of your whole life policy and take the cash value, it’s still worth asking your insurer about them to understand all of your options.
If you want to cancel your whole life policy just to get the cash surrender value, there are options available to you other than surrendering the policy:
Withdrawing cash from the cash value amount. Doing this can 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 your insurer will still apply an interest rate to the loan when you pay it back.
Selling the policy to a life settlement group. The option to sell your policy is typically only available to older policy owners who are expected to live another five to 10 years.
It’s much more complicated to cancel a whole life insurance policy than it is to cancel a term life insurance policy, so take the time to review all of your options and understand the fine print. You should always consult a financial advisor before making a big financial decision.
If you’re looking to lower your premiums by decreasing your whole life coverage, it’s possible to do so, but it will be significantly more complicated than reducing the coverage on a term life policy.
You can contact your insurance company to find out if decreasing your coverage is an option, but there are better ways to lower your monthly premiums, like taking a reduced paid-up option or shopping for a more affordable term life policy.
If you’ve had your policy for a long time, you 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, and the surrender fees you owe to your insurer.
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.
When you surrender a whole life insurance policy, your beneficiaries will no longer receive the death benefit when you die. If you had your whole life insurance coverage for long enough, you may also get some cash from the cash value of the policy.