How to cancel your whole life insurance policy

It’s not as easy as canceling term life.

Logan SachonAnna Swartz 1600

Logan Sachon & Anna Swartz

Published September 26, 2019

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  • Whole life insurance is a type of permanent policy that stays active as long as you pay the premiums

  • If you cancel your policy, you may receive the cash surrender value of the policy — it’s basically like cashing out

  • But whether or not you’re able to get the cash surrender value depends on how long the policy has been active — canceling in the first few years of the policy may mean you’ll have to pay fees and you might not get any of the cash value

There are many reasons you might want to cancel a life insurance policy, and people regularly cancel or change their life insurance policies — 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 call your insurance provider to cancel your whole life insurance policy, you’re officially "surrendering" the policy, in insurance lingo. But unlike term insurance, the cash value of whole insurance means you can't simply stop paying the 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.


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What is whole life insurance?

There are two main categories of life insurance policies: Whole life insurance and term life insurance. With term life, you pay a monthly premium to keep the policy in effect.

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 the policy length — whether its 10, 20 or 30 years — and then once the term is over, the policy is done.

Whole life insurance is different. It’s basically permanent life insurance, it stays active for 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, like with term life, and the cash value, which is invested, like any other retirement account.

The cash value portion of the whole life policy grows over time, and you can even take out a loan from your policy’s cash value, or use it for retirement.

Whole life insurance is significantly more expensive than term life, and most financial experts recommend term life for the average consumer. But whole life is the right choice for some people, especially if your estate will be subject to the estate tax after your death.

Can I cancel my whole life insurance policy at any time?

Just like with term life insurance, canceling your whole life policy starts with a call to your insurance provider. But the next steps will vary depending on how long you’ve owned your whole life policy— that’s the most important factor in determining 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 can 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. Here’s what you should know if you want to cancel your policy and cash out …

… after 2 or 3 years of owning the policy

The first few years of the policy are considered the 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.

… after 10 or 20 years of owning 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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What is 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.

What you’ll get from your policy depends on how long you’ve had it when you cancel it — as we explained above, if you cancel your whole life policy during the surrender period, you may not be able to get the cash value at all.

If you cancel after years or even decades of maintaining a whole life policy, the cash surrender value you’ll get is whatever’s left in your cash value after any fees and charges have been taken out, so it will be less than whatever the cash value of the policy is when you decide to cancel. The longer your policy’s been active, the more the cash surrender value will be worth.

Is the cash surrender value taxable?

At a basic level, a big chunk of the cash value you get out 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 basis.

The basis is the amount you’ve contributed into the cash value through your premiums. Any money the cash value has accrued beyond the basis you’ve paid can be taxed.

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. Be sure to talk to a tax professional for clarification on how taxes will affect your specific situation.

What happens if you stop paying whole life insurance premiums?

Another factor that could impact your options is something called nonforfeiture, which is a feature of whole life insurance that gives you options if you need or want to stop paying your premiums. The easiest way to understand nonforfeiture is to compare it with term life insurance. With term life, if you stop paying your premium, the policy lapses and 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):

  1. Cancel the policy and cash out. Assuming you’re past the surrender period and this is a possibility, you can cancel the policy and take the cash benefit, forfeiting future coverage

  2. Keep the death benefit for a shorter term. Your insurer may allow you to keep the death benefit from your whole life policy but only for a certain amount of time, similar to a term life policy

  3. Take a reduced paid-up option. Your insurer may also offer you the chance to take a reduced paid-up option, meaning you stop paying your premiums and you keep the whole life policy with 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 policyowners 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 and take the cash value, they may not matter to you, but you can ask your insurer about them just so you know all of your options.

How to get your policy’s cash value 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 policyowners 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.

Can I reduce my whole life insurance policy?

If you’re looking to lower your premiums by lowering the coverage on your whole life policy, 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 generally there are better ways to lower your whole life premiums, like taking a reduced paid-up option, which we explained above or doing a policy change to change your whole life insurance policy to term life insurance.