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Life insurance can provide financial security for your loved ones after your death. But what if you don't need life insurance anymore? Life insurance may become unnecessary if you get divorced and have no children to support or your spouse is nearing retirement and has enough to live on without an insurance payout.
You can cancel life insurance by ceasing premium payments, requesting cancellation or surrendering permanent life insurance for cash. Here's what to know.
How to Cancel Life Insurance
How to cancel a life insurance policy depends on what kind of policy you have and how long you've had it. Canceling term life insurance can be as easy as not making your premium payments or may require contacting your insurance agent or insurance company and filling out a form. Canceling permanent life insurance can be more complicated, depending on the type of policy, its cash value and how long the policy has been in force.
If You Instantly Have Buyer's Remorse
Did you regret your life insurance purchase almost immediately? The good news: Life insurance policies generally have a "free-look" period during which you can cancel your policy and receive a full refund. The free-look period can vary depending on state law, but in most cases, it's 10 to 30 days after you receive the policy. Check your life insurance policy documents to determine how long your free-look period is and how to cancel your policy during this period.
If You Have a Term Life Insurance Policy
There are a couple of options for canceling term life insurance, but doing so is generally simple.
Stop Paying Premiums
When you stop paying your term life insurance premiums, the insurance company will cancel your policy. Although this is one option for canceling term life insurance, it's not necessarily the best. If you forget to cancel any autopayments you've set up, premium payments could still be taken from your account or charged to your credit card. In addition, while insurance companies don't report your payments to credit bureaus, if you stop paying your premiums, they could turn your account over to collections. Collection accounts remain on your credit report for seven years and can negatively affect your credit score.
Request Cancellation
You can avoid misunderstandings and potential negative impacts on your credit score by telling your insurance company you want to cancel your life insurance. Check your policy or insurance company website for specifics on how to do this. You may have the option to cancel by calling customer service, contacting the insurance agent who sold you the policy or submitting a written request by mail or fax.
If You Have a Permanent Life Insurance Policy
There are a couple of ways to cancel a permanent life insurance policy.
Surrender the Policy and Take the Cash Value
Over time, permanent life insurance builds cash value. You can cancel (or surrender) your policy and receive the cash surrender value. Keep in mind that any previous loans or withdrawals from the policy will reduce the amount you receive. In addition, you'll have to pay surrender fees, which can be as high as 10% to 35%, and you may also owe taxes on the money you receive.
It takes time for the cash value in a life insurance policy to build up, so if your policy is relatively new, you may not get much money from surrendering the policy. In general, cash surrender value typically ranges from 30% to 50% of the premiums you've paid so far.
Sell the Policy
You may be able to sell your life insurance policy to a life settlement company. These companies purchase life insurance policies, pay the policyholder and then continue paying the premiums. When you die, the new owner of your policy receives the death benefit.
Most life settlement companies purchase universal and whole life insurance policies, but some also buy term life insurance policies. Generally, you'll need to be 65 or older and have a life insurance policy worth $100,000 or more to qualify for a life settlement. Typically, life settlement companies purchase policies for 10% to 25% of the death benefit amount. In addition, you may owe commission fees and income taxes on any money you receive.
Alternatives to Canceling Life Insurance
Whether you're thinking of canceling your life insurance because you can't afford the premiums or you no longer need the coverage, there are other options to consider.
- Convert your permanent life insurance to a term policy. You may be able to convert permanent life insurance to a term life insurance policy by using the policy's cash value to pay premiums. For example, if your permanent life insurance has enough cash value to pay 10 years' worth of term life insurance, it may be possible to convert it into a 10-year term life insurance policy.
- Reduce the policy's death benefit. You may be able to lower your term life insurance premiums by decreasing your policy's death benefit. If you have permanent life insurance, see if reduced paid-up insurance is an option. This means using the cash value in your policy to buy a policy that provides less coverage but is fully paid off.
- Use the policy's cash value to pay premiums. As the cash value of a permanent life insurance policy grows, you may be able to use it to cover your premiums. Keep in mind that if the cash value shrinks too much, it won't be enough to pay premiums, which could cause the policy to lapse.
- Make a 1035 exchange. Would you like to redirect premiums for coverage you no longer want toward other elements of your financial future? Under Section 1035 of the Internal Revenue Code, you may be able to replace a life insurance policy with another life insurance policy, an annuity or long-term care insurance, without any tax consequences. Be sure you understand the requirements and financial implications of a 1035 exchange, such as surrender charges or commissions.
Frequently Asked Questions
You can cancel life insurance whenever you want. However, there may be a termination fee for canceling permanent life insurance. In general, these cancellation penalties tend to be highest in the earlier years of your plan. Check with your insurance company to see if you'll face any fees or penalties for canceling your life insurance.
If you cancel a whole life insurance policy, you'll receive the policy's cash surrender value. The cash surrender value is calculated by subtracting any surrender fees, outstanding loans or unpaid premiums from the policy's current cash value.
You'll get a full refund if you cancel your life insurance policy before the first-look period ends. This period generally ranges from 10 to 30 days after you receive the policy. You won't get a refund for canceling term life insurance after the first-look period is over. However, if you cancel (or surrender) a permanent life insurance policy that has built up cash value, you'll receive the cash value minus surrender fees, unpaid premiums and outstanding loans.
Canceling your life insurance will have no direct impact on your credit score. However, canceling a policy you no longer need or switching to more affordable coverage can leave more money in your pocket. This extra cash could make it easier to pay your bills on time or pay down debt, both of which can positively impact your credit score.
The Bottom Line
Canceling life insurance is a big decision, so be sure to consider all your options before you cancel your policy. In most states, insurance companies can check your credit-based insurance scores when setting your policy rates and may charge less if you have a higher score. Credit-based insurance scores are based on similar factors as your consumer credit scores. Checking your credit score can reveal if it needs improvement. If so, taking steps to boost your regular credit score could increase your credit-based insurance score as well, potentially saving you money on life insurance.