Man reading life insurance plan

Is There a Penalty for Canceling Whole Life Insurance?

While whole life insurance may have served you well, the moment can come to pass where you no longer need (or want) a life insurance policy. Maybe paying the monthly premium has become too much, or maybe you’d rather use that money to knock items off your bucket list. Regardless of your reasons, canceling a life insurance policy is completely normal. It’s also normal to worry about what it will cost you.

In most cases, canceling your policy will not cost you an out-of-pocket fee. Barring that you follow whatever life insurance policy cancellation rules your provider has, you may even receive some money back. There is, however, an inherent loss; some required fees will be subtracted from your payout, so you will not get back all of the money you paid into the policy. But, as we will discuss in this article, there is a way to get even more money out of your unwanted policy. Read on to learn about what happens to the money if you cancel a life insurance policy, how much you will actually get back, and how selling your life insurance policy may be a better option than canceling it.

If I Cancel My Life Insurance, Do I Get Money Back?

Canceling whole life insurance—or any policy that has a cash value—is the only time you will get money back. Unfortunately, you will not get the entire cash value back when you cancel a policy, as some fees will be deducted.

Cash value life insurance policies have something called cash surrender value. This is the actual amount of money you receive back. Your policy’s cash surrender value is its cash value minus any administrative or otherwise additional fees. While you will not receive a bill for canceling your policy, you can expect some money to be subtracted from your final payout. Here are some of the factors that may deduct from your final payout:

  • Surrender Period: This is a predetermined amount of time in the first few years of owning a policy where canceling incurs a surrender fee. Every policy is different, but a surrender period can sometimes be up to the first ten years of ownership, and some surrender periods stipulate that if you cancel within the first couple of years, you will receive no money back at all. Usually, a surrender fee is just a percentage of the annual premium, and that percentage decreases the longer you have had the policy.
  • Administrative Fees: Insurance companies will always subtract some of the amount to account for them holding the policy, as well as services rendered.
  • Outstanding Loans: Cash value policies have the benefit of being able to withdraw loans against their balance. Needless to say, if you have a loan out against your cash value when you cancel your policy, that amount will be subtracted from your cash surrender value.
  • Taxes: Whole life insurance policies are what is known as tax-deferred, meaning you will not need to pay taxes on them until you actually receive the cash surrender value. Once you have received the amount, it will be taxed as income.
  • Breaking the Terms of the Policy: You may not be eligible for a payout in circumstances where you’re found to be at fault within the terms of your policy. This includes events like stopping payment on premiums or providing false information on your application.

While most of these are not massive fees, the sheer number of them can add up quickly, and before you know it, all you’re left with is a much smaller amount of money and the headache of having to cancel your policy. What would a better alternative be, then?

Don’t Cancel Your Life Insurance—Sell It Instead

Regardless of your reason to cancel a life insurance policy, selling it for a life settlement is almost always the better option. Not only will you have the help of an expert to guide you through the process, but the payout will be much higher than simply canceling. If you’re wanting to cancel your policy and are curious about what options you may have, please reach out to us at Life Settlement Advisors. You can also use our qualifications calculator to see if a life settlement is the right option for you. We’re happy to help answer any questions!

Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.
Life Settlement Advisors
Leo LaGrotte
At Life Settlement Advisors, we strive to be a voice of confidence and assurance for our clients. Our goal is to educate you about the life settlement process so you can make an educated decision about whether it is right for you.