Life insurance policies are typically bought to provide financial security for loved ones in case of the policyholder’s untimely death. However, there may come a time when the policyholder needs to cancel their life insurance policy. Cancelling a policy is relatively easy, and the process depends on the type of policy the policyholder has.
Cancelling a Term Life Insurance Policy
Term life insurance policies provide coverage for a specific term, such as 10 or 20 years, and have no investment component. Cancelling a term policy is straightforward. The policyholder can simply stop paying the premium and write a letter or call their insurer to cancel the policy. Some insurers may also have a form on their website to terminate the policy.
Cancelling a Whole Life Insurance Policy
Whole life insurance policies are different from term policies in that they never expire, and a portion of the premium payments goes towards building up equity in the policy. Cancelling a whole life insurance policy means surrendering or opting out of the policy. If the policy has been in place for a long time and has built up cash value, the policyholder may receive a lump sum payment from the insurer after deducting surrender fees and any outstanding loan balance. However, if the policyholder thinks they may need the death benefit in the future, they could take a policy loan against the cash value instead of surrendering the policy.
Alternatives to Cancelling a Whole Life Insurance Policy
If the policyholder does not want to surrender their whole life insurance policy, they could consider a tax-free life insurance policy exchange, also known as a 1035 exchange, or selling their policy for profit. A tax-free exchange allows the policyholder to replace their whole life insurance policy with a new one without paying taxes. Selling a whole life insurance policy can be complicated, and the policyholder will need to find reputable brokers to purchase the policy and get offers from each of them. The amount of money the policyholder receives from selling their policy will vary since the broker expects a commission for selling it.
Reasons to Cancel a Life Insurance Policy
The most common situations when it could make sense to cancel a life insurance policy are a change in financial circumstances, such as job loss or rising inflation, or if the policyholder no longer needs the death benefit coverage, such as when their spouse no longer needs to replace their income or when their children are no longer financially dependent.
Ultimately, cancelling a life insurance policy is a personal decision, and policyholders should weigh their options carefully before making a decision.
- Investopedia. Life Insurance Policy Cancellation Rules
- Investopedia. How To Cancel Your Life Insurance Policy
- Bankrate. How To Cancel A Life Insurance Policy
- NerdWallet. How To Cancel Your Life Insurance Policy
- Legal & General. 5 Things To Know About Canceling Your Life Insurance Policy