If you’re thinking about canceling a life insurance policy, you’re not alone. After all, who wouldn’t benefit from eliminating costly monthly premiums? Surrendering your policy or letting the policy lapse can seem like a quick fix, but these choices leave money on the table, literally.
You may qualify for a better option: selling your policy through a life settlement. How do life settlements work? What is the difference between canceling a policy, letting it lapse, and selling it? Do you qualify for a life settlement? We have the answers in this blog.
When Should I Stop Paying Life Insurance Premiums?
The main reason to cancel a life insurance policy is because you’re not getting enough value to justify continuing to pay premiums. It’s worth considering whether or not to sell your life insurance policy if you’re in either of the following situations:
- The cost of monthly premiums is too high to manage with your current budget. When you sign up for a life insurance policy, you typically lock in a rate for monthly premiums. These rates are based on your age, health, policy term length, and death benefit value. For example, a 30 year old male with average health could sign up for a 10-year term policy worth $1 million. According to U.S. News, this type of policy would cost the holder an average of $63.75 per month. To sign up for that same policy, a 65 year old male would have to pay an average of $721 per month. For many senior citizens living on a fixed income, it can be difficult to come up with an extra $63.75 per month, and $721 is out of the question.
- You don’t have dependents who would rely on your death benefit payout for financial support. The purpose of life insurance is to help your spouse and children deal with the financial challenges that could result from your death. Funeral costs, debts, loss of income… it all adds up. However, perhaps you’ve already paid off your debts. Or maybe your children are grown up and financially successful. Or you might not have children. In these cases, reducing your monthly costs could be more beneficial than keeping your life insurance policy.
If you find yourself in any of these situations, you might consider your options for reducing or eliminating your life insurance premium costs. You can do so by canceling or surrendering your policy, discontinue making payments, or by opting for a life settlement. We’ll cover the details of each option next.
If I Cancel My Life Insurance Do I Get Money Back?
If you cancel or surrender your life insurance policy (these terms are often used interchangeably), you may be able to get a portion of the premiums you have paid back as a lump-sum payout. You also save money by eliminating your future monthly payments. However, fees will cut into your payout, and not all policies offer a chance to get some of your money back.
- Whole Life/Universal Life Insurance Policy: These policies don’t expire. When you sign up, you sign up for life. These policies also act as an asset. As you pay premiums and build up equity, you can take out a loan using that value as collateral. Whole life/Universal life insurance policies typically offer money back when you cancel.
- Term Life Insurance Policy: These policies expire after a set period of time. Terms are typically 10, 20, or 30 years, but different providers offer different increments. When your term policy expires, you can either convert the policy to whole life or universal life (typically with higher premiums) or go without insurance. Term life insurance policies usually do not offer money back when you cancel.
If you aren’t sure which type of policy you have or if you can get money back when you cancel, contact your life insurance provider.
How Do I Get a Refund from Insurance?
Certain policies may qualify for a refund of life insurance premiums that you’ve already paid when you cancel your policy. If you have a policy that qualifies—typically these are whole life or universal life insurance policies—you need to contact your insurance provider to cancel. If you just stop paying your premiums, your policy will lapse. This means you will no longer be covered, and you won’t receive any money back.
Some insurance providers handle cancellations over the phone, while others require you to fill out a form online or mail in a letter. Contact your provider to see which method they require.
Can I Cash Out My Life Insurance Policy?
Canceling a life insurance policy with cash value isn’t your only option—you can also sell the entire policy, or a portion of it. This is called a life settlement, and it gives qualifying policyholders a better financial alternative to surrendering their policy or letting it lapse. To qualify for this option, you need to meet the following requirements:
- You must be at least 65 years of age (certain medical conditions may reduce the minimum age).
- Your policy must be at least 2 years old.
- Your policy must have a death benefit of $100,000 or more.
- Your premiums must be 5% or less of the policy’s death benefit.
You can learn more about life settlement qualifications here.
Life settlements aren’t limited by the type of life insurance policy you have. For example, both whole and term policies may be eligible. These listed requirements may vary by state, so contact a trusted advisor to help navigate the specific qualifications in your area.
Is It a Good Idea To Cancel Life Insurance?
Deciding to cancel your life insurance to save money on premiums may seem like a necessary choice, but you could have a better option. By opting for a life settlement, you can sell your entire policy or just a portion of it. Selling part of your policy could be ideal if you want to eliminate your monthly premium payments, but you still want to retain a death benefit for your heirs. Selling your entire policy often makes sense when you want to completely eliminate premiums.
To see if you qualify for a life settlement and how valuable your policy may be, use our qualification calculator.
You can also speak with one of our trusted experts at Life Settlement Advisors for guidance on what your options are and what could be the best path forward.