Although everyone’s situation is different, canceling a life Insurance policy—or selling it—is a fairly painless way to help retirees increase their cash flow. Unfortunately, like everything to do with insurance, understanding how to cancel a life insurance policy is a bit complicated. To make matters simple, Life Settlement Advisors put together this guide. In it, we will answer common questions like:
- Why do people cancel their life insurance?
- How can someone cancel their life insurance policy?
- When can you cancel a life insurance policy?
- What is the refund process like after canceling a life insurance policy?
- Are there other ways to receive a payout from your life insurance policy?
- Who do you need to work with to cancel your policy, and receive the best payout?
- Is it okay not to have a life insurance policy?
Top Four Reasons To Cancel a Life Insurance Policy
Premiums Are Too High
Costly premiums are the number one reason to cancel a life insurance policy. To illustrate just how pricey these payments can be, a recent Business Insider article broke down the average cost of different life insurance policies:
- Whole life insurance: $620 ($52 per month)
- Universal life insurance: $671 ($56 per month)
- Term life insurance: $640 ($53 per month)
- Variable life insurance: $483 ($40 per month)
Although $56 a month may not feel like much when you’re earning a regular paycheck, things change when budgeting for a fixed income. According to the US Census Bureau, the average retirement income for people 65 and older is $47,357. For retirees with an average or below-average annual income, a life insurance premium makes a significant dent in their budget.
If your annual income is higher than average, a monthly premium payment can still negatively impact your ability to enjoy retirement. And would you rather pay a premium, or put that money towards a much-needed vacation after 40+ years in the working world?
The Need For More Profitable Investments
All retirees must budget strategically. Instead of paying a monthly life insurance premium, it makes more financial sense to put that money towards high-return investments. Additionally, canceling your life insurance policy won’t just eliminate your monthly premiums; you will also receive a cash payout. This means you can use the money from the cancellation of your policy to pay off debts or to fund more lucrative investments. Put simply, getting rid of an unwanted life insurance policy gives you more freedom to take advantage of your retirement and invest in what makes you happy.
Healthcare and Other Costly Emergencies
According to the Federal Bureau of Labor Statistics (BLS), U.S. households led by someone aged 65 to 74 spend an average of $5,956 a year on healthcare. However, that number is likely to be higher if you have a chronic illness or if sudden health emergencies arise.
Of course, there are other significant expenses to account for outside of healthcare. The same report from the BLS states that housing is the greatest expense for people 55 and older. If your house begins to flood, or you decide to move into a higher-end retirement community, you must be prepared to shell out decent sums of money.
If health emergencies or changes in your cost of living arise, the money earned from canceling your life insurance policy can be used to cover those expenses. This ensures you have money on hand to prepare for sudden changes and prevents you from dipping too much into your savings accounts.
Inflation and Economic Unrest
Unfortunately, we are all at the mercy of market trends, and the natural ups and downs of the global economy greatly impact your retirement plans. While the world experienced significant economic turbulence throughout 2022, many individuals felt uneasy about retirement. As the value of stocks and bonds decreased and inflation continued to climb, many searched for alternative ways to fund their retirement. Canceling a life insurance policy is a simple way to lessen the blow of inflation and other economic challenges to ensure greater financial security in retirement.
What Are the Types of Cancelation in Insurance?
If you want to unburden yourself from a life insurance policy, you have two options: surrendering the policy and pursuing a life settlement. Let’s explore each option in detail and see which one is right for you.
Surrendering a Policy
What Is Surrendering Your Policy? | Surrendering your life insurance policy involves canceling the policy for its surrender value. You can choose to surrender your whole policy or a portion of it, depending on your insurance provider’s rules.
How Do You Surrender Your Policy? | To surrender your policy, you will need to work directly with your life insurance company representatives. Although every surrender process differs, insurers often allow you to submit a surrender request online.
What Is The Payout for Surrendering Your Policy? | Regarding compensation, the total of the surrender payout is the cash value of your policy minus any surrender fees. The surrender value of a policy is based on the portion of premiums paid into your account plus interest and investment gains. Additionally, you are responsible for paying taxes on the portion of your payout above the cost basis.
Is Surrendering Your Policy The Best Option? | Although the surrender process is fairly simple, it is not the most lucrative option. If you want the greatest value out of your policy, a life settlement is the better option.
What Is a Life Settlement? | Instead of surrendering your policy to your insurance provider, you can choose to sell your policy via a life settlement. In the life settlement process, the buyer becomes responsible for completing your monthly premium payments and, in turn, receives the death benefit when you pass away. Whole life, term, second-to-die, and universal policies are all eligible to sell on the secondary market. However, you must meet certain requirements to successfully pursue a life settlement. To discover if you qualify, try our qualification calculator.
What Is The Payout for a Life Settlement? | Selling a life insurance policy provides a significantly greater profit than a policy’s surrender value. Although the exact figure of a life settlement depends on your specific policy, the typical payout ranges from 10% to 25% of the policy benefit amount. Another advantage of life settlements is that you can sell a portion of it. This allows you to retain some of the benefits of your life insurance policy, should you want to keep them.
What Are the Benefits of Choosing a Life Settlement? | Aside from a larger payout, there are many benefits to choosing a life settlement, including:
- Not having to pay premiums saves you money each month
- It is possible to retain a portion of the death benefit
- Life settlements require no out-of-pocket costs
- Life settlements can provide 4 to 7 times more than the cash surrender value of a policy
Can Life Insurance Be Canceled at Any Time?
According to general life insurance policy cancellation rules, you can cancel your policy anytime, for any reason. However, if you want your premiums to be repaid in full, you must cancel within the free look period. This period typically lasts between 10 to 30 days and varies depending on where you live. After the free look period, the cancellation of an insurance policy will not refund the money you invested in premiums.
If you choose to sell your policy via a life settlement, you must meet the following requirements:
- Life Expectancy | You must have a life expectancy of 15 years or less to qualify. Life expectancy is calculated by considering your existing health issues, your medical records over the past three years, and your age.
- Age | Life settlements are most often provided to people aged 65 years or older. In some unique circumstances, a younger person can qualify.
- Premium Amount | If your monthly premium is on the lower end, then your policy is more likely to be sold.
- Policy Type | As we mentioned above, whole life, term, second-to-die, and universal policies are all eligible to be sold. However, your policy must also be at least two years old to qualify.
- Death Benefit Amount | Your death benefit must be at least $100,000 to pursue a life settlement.
Do You Get Refunded After Canceling an Insurance Policy?
As we mentioned above, surrendering and selling your life insurance policy will provide you with cash amounts. However, these payouts are not intended to be “refunds.” If you choose to surrender or sell your life insurance policy, you will no longer own the policy and will not receive a death benefit. Put simply, the payouts from a life settlement or policy surrender are not intended to match your death benefit or the amount you paid into your policy over the years.
If I Cancel My Whole Life Insurance, Do I Get My Money Back?
The payouts for selling or surrendering a life insurance policy vary greatly depending on your unique situation. Regarding whole life insurance, you will receive a certain dollar amount after surrendering or selling your policy, but it will not be a complete refund of your premium payments, and the amount is not intended to replace your death benefit. But remember, you will always receive a greater payout from a life settlement than surrendering your policy.
Who Can Cancel a Policy for Life Insurance?
So long as you are the policy owner, you can cancel your life insurance. However, if you choose to pursue a life settlement, you shouldn’t work with just any company; you should seek out a life settlement broker. When selling your life insurance policy, life settlement brokers are meant to serve your best interest and ensure you get the most profitable outcome possible for your life settlement. Instead of simply buying your policy, a broker will shop your policy around to get the best deal. Because life settlements are complex transactions, working with a licensed and experienced broker is the best way to ensure the process goes smoothly and all legal and financial risks are averted.
Brokers help support you throughout the life settlement process by:
- Identifying the best deals for your policy
- Helping you navigate the underwriting process
- Assisting you with the completion of the closing documents
- Facilitating negotiations to ensure you receive the best payout possible
Is It Ok To Have No Life Insurance?
The answer to this question depends on your specific situation. If you still have dependents and are likely to have amassed extensive debt at the time of your passing, having a life insurance policy is a good idea. However, if no one depends on you financially and your debts have mostly been paid off, you probably don’t need your life insurance anymore. To determine if getting rid of your life insurance policy is a smart financial move, we recommend consulting with a financial advisor.
Need Help Selling Your Life Insurance Policy? Life Settlement Advisors Is Here for You
Ultimately, life settlements are a straightforward and profitable method to improve your financial stability. At Life Settlement Advisors, we are proud to help seniors free themselves from unwanted life insurance policies and enjoy greater financial freedom in retirement. If you’re ready to explore life settlements as an option, see if you qualify or sign up for a free consultation.