There are plenty of reasons why you might no longer want or need a life insurance policy. Maybe you no longer have any dependents to worry about, or maybe you can’t afford to keep paying the premiums. Or, maybe you just have a major expense you need to cover, and could really use the cash.
It’s not always easy to know what your choices are when it comes to life insurance cancellation, though. For example, you might ask yourself (or your financial advisor) the basic question, “Should I cancel my life insurance policy?” With life insurance representing a substantial investment, you’re also probably eager to recoup any value you can.
In this blog, we’ll answer a handful of the most frequently asked questions about canceling a life insurance policy. That way, you can understand your options, the advantages and disadvantages of each, and the ins and outs of life insurance policy cancellation rules.
What Is a Good Reason to Cancel a Life Insurance Policy?
When someone is thinking about canceling their life insurance policy, it’s usually because their circumstances have changed and the policy is no longer needed or wanted. These reasons are often budget-related (like not being able to afford to keep paying the premiums), family/lifestyle-related (like no longer having dependents to worry about), or a combination of both. Maybe you just have new expenses you need to cover, or want to take an incredible vacation.
Is There a Difference between Cancellation and Surrender of Insurance Policy?
As they relate to a life insurance policy, the terms “cancel” and “surrender” are used interchangeably. Whether you call it canceling or surrendering your policy, it means you stop paying the premiums, discontinue coverage, and receive a payout (depending on eligibility).
If I Cancel My Life Insurance Do I Get Money Back?
When canceling a whole life insurance policy, you can recoup its cash surrender value. That’s the policy’s accumulated cash value (money you’ve paid into the policy, as well as earned interest) minus any surrender fees outlined within your policy documents.
If I Cancel My Term Life Insurance Do I Get Money Back?
Since term life policies don’t build up cash value over time (like a whole life policy does), you won’t be able to recoup your investment if you cancel the policy. Instead, your coverage will simply end.
What Does It Mean to Let a Policy Lapse?
The other option for discontinuing unneeded or unwanted coverage is simply letting the policy lapse. This means you stop paying the premiums, and the policy is discontinued by default. This option is generally not recommended, as you won’t recover what you’ve paid in premiums over time (like you would if you canceled/ or surrendered the policy instead).
How Do I Cancel My Life Insurance Policy?
Depending on your provider, you’ll usually have at least a couple of different ways you can go about canceling a policy—by phone, online, or by letter. If you’re about to cancel or surrender your policy, your best bet is to reach out to your provider, who can tell you how to cancel your life insurance policy online, cancel the life insurance policy via letter, or cancel your policy in person or over the phone.
How Long Do You Have to Cancel a Life Insurance Policy?
Technically, you can cancel or surrender a policy at any time. If you want to terminate a new policy and receive a refund on your premium, however, you’ll need to do so within the “free look” period. This usually means the first 10 to 30 days from the policy’s start date, so you’ll need to check your policy documents. During this period, canceling the policy won’t cost you anything in the way of fees or penalties, and you can receive a full refund.
What Are the Tax Consequences of Surrendering a Life Insurance Policy?
Under U.S. tax laws, the payout you receive as a discontinued policy’s cash surrender value is taxable as income. The exact amount depends on how much you’ve paid into the policy to date (as you’ve paid the premiums over time). This amount is called the “cash basis.” Anything up to the cash basis value will be a tax-free return of principal. Whatever you receive in return that exceeds the policy’s cash basis will then be taxed as regular income.
Is It Worth It to Cancel Whole Life Insurance?
For many people, canceling or surrendering their policy is going to be less than ideal, due to factors like the tax consequences, lost value, and surrender fees. Fortunately, there’s another option: life settlements.
How Do Life Settlements Work?
When you opt for a life settlement, it means that instead of canceling your policy or letting it lapse, you sell it to a third party (Life Settlement Advisors can help you with this) for a one-time cash payout. The third-party buyer continues to pay the premiums, and then ultimately receives the death benefit. The primary advantage of this approach is in the amount of value you can recoup, which is going to be more than the cash surrender value (but less than the death benefit).
Who Qualifies for a Life Settlement?
A policyholder who is eligible for a life settlement:
- Is at least 65 years old (or qualifies through certain medical conditions).
- Has a policy that is at least 2 years old (varies by state).
- Has a policy with a death benefit of at least $100,000.
- Has a policy in which paid premiums account for 5% or less of its face amount.
- Might have a universal life, convertible term, whole life, or second-to-die policy (any of which can qualify for a life settlement).
What Kind of Life Settlement Can I Receive?
At Life Settlement Advisors, we’ll help you understand your options. On our website, you can use our life settlement qualification calculator to check your eligibility, or contact us directly with any questions you have about the process.