How to cancel a life insurance policy
Life insurance is designed to be with you for the long haul. People typically buy coverage that lasts years or even decades, providing a financial cushion through many of life’s unknowns.
As life changes, though, you might decide that your policy isn’t right for you anymore. So, can you cancel life insurance? It’s possible to cancel a life insurance policy, but it’s important to think through your financial backup plan first. Before you cancel, here’s what to know to avoid leaving your loved ones unprotected.
What to consider before canceling your life insurance policy
Some of the reasons for canceling life insurance include:
- You no longer need it
- You’re replacing it with a different policy
- The payments have become too expensive
Before you cancel, make sure that you truly no longer need the coverage. Life insurance helps cover your loved ones’ current and future financial needs. You might think that savings or other assets are enough, but an unexpected job loss, new baby, or family illness can mean that your expenses are suddenly bigger than planned. Our life insurance calculator can help you determine your coverage needs over the long term.
Keep in mind that premiums go up as you get older, so if you find later that you changed your mind and still need coverage, it will likely be more expensive. If you’ve found a different policy you plan to buy instead, make sure that it’s in place before canceling your first one to avoid any surprises. Some people also decide to own multiple life insurance policies, and stagger them over time, to address their unique needs.
Also, be aware that a new policy comes with a contestability period, which usually lasts one to two years from the time you purchase it. During that time, the insurance company can investigate claims and decline to pay in certain cases, like suicide.
Finally, let your partner, kids, or other beneficiaries know that you’ve canceled your life insurance. You don’t want them to be depending on that coverage, only to find out that it’s no longer there.
What happens when you cancel a life insurance policy?
The cancelation process is different depending on whether you have a term or permanent life insurance policy – and may even differ by insurance carrier. Here’s how each one typically works:
Term life
To cancel a term life insurance policy, call your insurer and let them know that you’d like to discontinue your coverage. You’ll need to fill out a form to initiate the process. You won’t receive any money back from the policy, but you can request a premium refund if you pay premiums on a schedule other than monthly. For example, if you pay an annual premium in April and cancel in May, you can request the portion of the premiums that covered June through the following April.
You can also choose to simply stop making payments, which will result in your policy lapsing. Most insurers offer a grace period of approximately 30 days after you miss your payment. During the grace period, you can pay the premium and any fees to bring the policy current. After that, your policy is considered canceled.
Permanent life
Permanent life insurance, which also includes final expense insurance, is a policy that lasts for your lifetime as long as you keep up with payments. It also builds cash value over time.
If you decide to cancel your policy, you’re entitled to receive the cash value that has built up in the policy. This is called the cash surrender value, so terminating a permanent life insurance policy is technically called a “surrender.” Depending on the type of policy, there might be a fee associated with surrendering the policy, which the insurer will deduct from your cash value. It typically comes into play with universal policies – check your policy paperwork for specifics.
Like a term life insurance policy, you can also stop making payments and your coverage will discontinue.
Alternatives to canceling a policy
- Reapply for better rates. Quit smoking or lost weight and found a cheaper policy? Before you cancel and buy a new life insurance product, ask your insurance company about reapplying for better rates with your current policy. Many insurers will lower your rates if you’ve had positive health changes or been nicotine-free for at least a year. It typically involves reapplying and taking a new medical exam.
- Look at other payment options. Life insurance is generally one of the most cost-effective ways to protect your family. You pay a little each month now, your family can potentially access a much bigger payout later. If you’re struggling with payments, talk to your insurer. You might be able to change to semi-annual or annual payments if you’re going through a few tight months. Another option? Talk to your loved ones for help. Since they’re the ones who will benefit from the policy, they may be willing to chip in to help you keep it active now.
- Reduce your coverage amount. Some life insurance is often better than no coverage. If you no longer need the same level of protection, talk to your insurer about lowering your coverage amount instead of canceling life insurance. Depending on the current size of your premiums and how long you’ve had it, this can result in lower premiums, too.
Still have questions or want more information about how to cancel a life insurance policy?
We’re here to help. eFinancial works with top-rated life insurance companies to help you find the right coverage for you and your family. Call us or start your quote online today.