Man signing life insurance paperwork

Life Insurance Policy Cancellation Rules

Life insurance can create a financial safety net for those who have recently bought a house, are married, or have children. In fact, 68% of those with life insurance feel financially secure. However, as you get older and your life changes, you may come to realize that you don’t need your life insurance policy anymore. In fact, you might determine that your life insurance is more of a burden than a help. If you feel that way, canceling a life insurance policy is a valid option. Plus, canceling a life insurance policy with cash value may come with a payout, which many retirees enjoy should they need extra income or want to use that money for something else.

What do you have to do to go about canceling your life insurance policy, though? How much money can you get back? What rules do you have to follow? We answer all these questions and more here.

What Is a Good Reason to Cancel Insurance?

There are several reasons for canceling an insurance policy, such as:

  • You don’t have financial dependents anymore.
  • You don’t have any financial debt.
  • You want to invest your money elsewhere.
  • You want to use the cash from your policy.
  • You can’t afford the cost of the premiums.

Many people take out a life insurance policy to support their family financially should the policy holder pass away. Once your children grow up or you no longer have any debt, your family won’t necessarily need that support anymore. Instead of paying money towards a life insurance policy every month, you can invest that money elsewhere or use it to get the most out of it while you can.

You also might elect to cancel your life insurance if your retirement funds are not as high as you hoped or if the monthly premium payments become too much. Life insurance premiums, on average, cost $40-55 a month. Over the span of a year, that adds up to $480-660. If you don’t have family who need the money after you pass away, cancellation of your insurance policy is a great option. Plus, you may be able to get back part, if not more, than the total amount of your premiums when you cancel your policy.

Can Life Insurance Be Canceled Because of Illness?

If you have some sort of ailment and worry your insurance provider might cancel your life insurance policy, don’t worry. Your insurance provider cannot cancel your policy as long as you let them know about your condition when you applied for the policy, if it was pre existing. When you first apply for life insurance, providers look at several factors to determine whether to provide you coverage. These factors include:

  • Medical history
  • Financial history
  • Risky lifestyle choices
  • Job title
  • Criminal record

If the insurance provider deems you high-risk in any of these areas, they can deny you life insurance. If you answered their questions honestly and they approved you, they cannot take your policy away from you based on illness alone.

Although, you can cancel your life insurance policy if you become ill. You may choose not to so your family reaps the benefits from it should you pass away. However, if you need the money to pay for medical bills, you do have that option. You do not need to cancel your life insurance policy to pay for medical expenses if you have an accelerated death benefit rider add-on to your life insurance policy. With certain terminal illnesses or medical conditions, you can use some of the money from your death benefit to pay for associated costs. That money will then be subtracted from the death benefit your loved ones receive after you pass away. Qualifications to use this add-on vary from provider to provider.

Can You Get Money Back From a Life Insurance Policy?

You can get money back from your life insurance policy should you choose to cancel it. The amount you receive will vary depending on your policy, insurance terms, and how long you’ve had the policy. All providers also have some sort of insurance cancellation notice requirement. If you don’t submit a notice, you won’t receive a refund on your life insurance premiums. You usually won’t qualify for a refund if you cancel within the first two years of having the life insurance policy, either.

If you have a guaranteed surrender value policy, you can get some money back on your policy if you cancel after having the policy for three years. The value you get at that point will be 30% of what you paid in premiums, excluding those of the first year. In years 4-7, that refund amount jumps to 50% of the value of your premiums. After that, your insurance provider will decide how much you’ll get paid back based on the factors we mentioned above.

If you have a non-guaranteed surrender value policy, the amount of money you’ll receive back is based on:

  • How much you’ve invested into your plan
  • Any bonuses associated with the policy
  • How much you’ve paid in premiums
  • How long you’ve had the policy

This value is much more variable than with the guaranteed surrender one.

Should you decide that you want to keep your life insurance but also need some cash, you may be able to take out a loan against your life insurance policy. With this option, you can borrow the amount you need from your life insurance plan, but the amount your beneficiaries receive upon your death will be lower.

Another option you have to get even more money back on your life insurance policy is to sell it to a third party for a life settlement. The third party will then pay you in cash. The value of a life settlement is usually 4-7 times higher than the cash surrender value of canceling a policy. The third party company will then pay for your premiums and receive your death benefit.

What Reasons Would Life Insurance Not Pay Out?

Some of the reasons why you would not receive money upon canceling your life insurance are:

  • You do not give the provider a notice. If you merely stop paying your premiums, you will not qualify for a payout.
  • You lied on your application. If the insurance company finds out you provided either false or incomplete information on your application, you will not be eligible for a payout.
  • You have not had your policy for more than two years. It usually takes at least two years for policies to start gaining value. The exception is if you cancel within the first 10-30 days after starting your policy. The number of days varies depending on the state you live in.
  • You have term life insurance. This type of insurance won’t gain any value until it reaches its term, which is why you won’t have a payout if you cancel it early. You also won’t get your money back if you outlive the plan’s term. The exception is if you have a return of premium (ROP) life insurance rider add-on. In that case, you will get all or some of the money back should you outlive the plan.

To verify whether you will get a payout upon cancellation, review either your policy document or contract. You can also call your insurance provider to ask.

How Long Do You Have to Cancel a Life Insurance Policy?

You can cancel your life insurance policy whenever you want. However, you should note there are specific times that are not eligible to receive money back.  If you cancel it during the free look period—that first 10-30 days after you get your policy—or after the first three years, you will get at least some of your money back. You don’t typically receive any money for cancellation during the first two years with the policy because it hasn’t had the time to earn any cash value. If you do qualify to get some money back, you will usually receive it within 30 days of cancellation.

If you decide that you’d rather do a life settlement rather than canceling your policy, the process typically takes approximately 90 days to complete, from application to payout. We cover how to apply for a life settlement in a bit.

How Do I Request to Cancel My Life Insurance Policy?

To make a life insurance policy cancellation request, you can either:

  • Send an email
  • Write a letter
  • Call your provider
  • Submit a form

Your insurance provider may have a specific way they want you to inform them of the cancellation, so check your policy as well as the provider’s website to ensure you do it correctly and don’t hinder your chances of getting the fullest payout you can.

How Do You Write an Email to Cancel an Insurance Policy?

If you want to write an email or letter to inform your insurance provider of your cancellation, include as much information as possible. This makes it easier for the insurance company to identify you and cancel your plan in a timely fashion. That information should include your:

  • Name
  • Address
  • Contact information
  • Policy number
  • Desired cancellation date
  • Reason for canceling
  • Request for written confirmation of cancellation

Before you send the letter or email, try to find the cancellation department’s contact information. Sending your request to them directly will allow for quicker processing on their end. Note that you have to be the policy holder to cancel life insurance. You may also want to check your policy document or contract to see if it comes with any cancellation fees. If so, they typically decrease over time.

Life settlements require more time and energy than it takes to cancel your life insurance policy through a letter, but you receive a higher payout in the end.

How Do You Get a Life Settlement?

Before you take the time to apply for a life settlement, you should first look into whether you qualify. Ideal candidates are those who are 65 or older and have experienced a change in their health since they first took out the life insurance policy, leading to a life expectancy of 15 years or less. Exceptions can be made, though, so we recommend talking to a professional. Life Settlement Advisors has a qualification calculator to help you gauge whether a life settlement is a good option for you. If you do qualify, next steps will look like this:

  1. You do some research on life settlement companies. If you choose Life Settlement Advisors, we’ll be by your side every step of the way.
  2. You apply for a life settlement. When you do, make sure to include a copy of your life insurance policy for the life settlement company to review.
  3. The life settlement company will review your application. They will work with third party underwriters to review your qualifications, medical records, application, and insurance policy.
  4. The life settlement company will make a decision. They will make you an offer based on all the documents you submitted.
  5. You either accept or reject the offer. If you accept, you will receive a closing packet. Once you complete and return it in good order, the changes of ownership and beneficiary will be submitted to the insurance company. Once the changes are completed you will receive your payout.

With Life Settlement Advisors, you’ll get all the information you need to decide whether a life settlement is the best option for a payout.

Don’t Cancel Your Life Insurance. Settle It With Life Settlement Advisors

Don’t let an unnecessary life insurance plan burden you anymore. Experience financial freedom with a life settlement. Life Settlement Advisors will help you gain that freedom. Whether you want to sell your entire life insurance policy or just part of it, our team will be there to provide you with sound advice throughout your settlement journey. We have over 50 years of combined experience and put education at the forefront of our services.

To find out whether you qualify for a life settlement, check out our qualification calculator. Or, if you’re ready to take the plunge and apply for a life settlement, submit your case to us.