Life insurance provides financial protection to your family if you die unexpectedly. It is a financial lifeline at a time when your family needs it most.
However, sometimes it may make sense to cancel your life insurance policy. For example, if your policy no longer meets your needs, it would be best to replace it with different one. Or, if you no longer have any dependents, you may be better off cancelling your policy altogether.
Continue reading to find out how to cancel your life insurance policy.
Reasons to cancel your policy
Life insurance needs are not set in stone. They change as your life changes, which means the coverage you bought years ago may no longer be appropriate for you now. In such a situation, cancelling the existing policy and buying a new one might be a smart move.
Generally, policyholders cancel their life insurance coverage for one of these reasons:
Existing policy is not appropriate for current needs
You may have heard that being under-insured is bad. That is completely true, but it does not mean being over-insured is good.
Having too much protection means you are wasting precious dollars on coverage that your family does not need. You could spend that money elsewhere, for instance going on your dream vacation.
As you age, the policy you purchased years ago is more likely to over-insure than under-insure. Here is an example to demonstrate this point.
Let’s say, two decades back, you bought a large term life plan to secure your family’s future. At that time, your children were young, and you had a big mortgage. But now that the kids have left the nest and the mortgage has been paid off, you probably will not need as much protection. A smaller term plan to provide your spouse with sufficient retirement income might be a better option instead.
Of course, the opposite can also be true. You may find your current plan insufficient for all your present needs. For example, a small term life insurance policy that you bought to cover your student loan might prove inadequate now that you are married and about to start a family.
Loss of income
Anyone with dependents, or debts that may pass on to others after death, needs life insurance. However, it is equally true that life insurance is not cheap for many. And when finances are tight, cancelling your policy to cut expenses might seem like the logical thing to do.
With that said, there are better ways to save money on monthly expenses. For example, you can replace your current policy with one that has a lower death benefit. Do not want to reduce the death benefit? Reducing the term length also brings down the monthly premiums.
Some life insurance is better than none. So, if you no longer can afford the existing premiums, buy a policy that is more affordable. Otherwise, your family may be left with huge medical bills and unpaid debts at the time of your death without any means to pay them off.
Found a better life insurance policy elsewhere
Some people do not compare rates before signing up with a life insurer, only to find out later that they could have got better rates elsewhere. Thankfully, correcting this mistake is easy and painless with term life insurance. This is because there is no cancelation fee to worry about with term life insurance.
If you find better rates elsewhere, switch providers. Given that premium rates vary from one insurer to the next, you might be able to reduce insurance costs significantly.
Health has improved considerably since the policy was bought
Life insurance companies classify their customers at different levels of risk. They assign each applicant a health classification based on the application details. How much you pay depends on the health classification you receive.
But what if your health improves considerably after you buy life insurance?
You can request that your insurer reconsider your current premium rate based on your improved health, although the insurer is not legally bound to accept it. If they do not, shop around for a new policy. You may well find other providers are willing to offer you better rates, even though you are a little older.
For example, let’s say you received a smoking-rate when you bought a term life policy two years ago. However, now that it has been over 12 months since you quit smoking, you may be eligible for a lower premium rate. If your current provider refuses to take a second look at your health profile, try other providers. There is a good chance they would be willing to offer you a lower rate.
Cash in a whole life policy for its cash surrender value
Whole life insurance serves a dual purpose. It provides lifelong coverage and accumulates wealth. These policies include an investment component — called cash value.
The cash grows on a tax-deferred basis, and you can access it in many ways, including cancelling the policy. For example, if your policy has accumulated sufficient cash value, you can cancel the coverage and use the cash value to fund your retirement.
When you terminate the coverage, the provider will pay the cash value minus any surrender charge and other fees. This amount is referred to as the cash surrender value.
The surrender fee is quite high during the first few years of coverage. Therefore, cancelling a whole life plan for its cash surrender value makes sense only if the policy is several years old.
No longer need life insurance
If you have no financial dependents or debt, you may decide to go without life insurance altogether.
Reasons you should not cancel your policy
Changes in your financial or personal situation might force you to consider cancelling your life insurance but think twice before taking this step. Firstly, cost of life insurance increases with age. If you were to need coverage again, you may have to pay much more than you did initially, especially if you develop health problems.
If you need more protection than offered by your current plan, consider augmenting it with a small policy. It is a more cost-effective way to ensure you have enough coverage than replacing the current plan with a new policy.
Want to cancel the existing plan for budgetary reasons? Before taking this step, ask yourself: “How will my dependents manage if they were to suddenly lose me?”
Your family members are the ones who may suffer most if you do not have life insurance. They may experience financial tragedy in addition to the tragedy of losing you. The financial tragedy is preventable.
If your budget has no room for life insurance bill, consider reducing the death benefit in exchange for a lower premium. That is a much better option than going without insurance.
When can you cancel life insurance?
You can cancel your life insurance policy at any time. You can end coverage one day after putting it in place or after 10 years. However, getting a new policy might not always be easy. Therefore, make sure you are terminating the existing policy for the right reasons.
Here are certain situations when cancelling a life insurance plan can make a lot of sense.
You do not need the protection that it offers
Having life insurance is like buying peace of mind. Once you have put a plan in place, you can rest easy knowing your family will be able to live comfortably even if you are no longer around. But once your kids become financially independent adults and you pay off your mortgage and other debts, you might no longer need the protection that life insurance offers.
Another provider is offering you a better rate
While it is an essential financial product, life insurance is rarely cheap. So, if you are getting a lower rate elsewhere, you may want to cancel your current policy and switch providers.
Your renewal premiums are too high
Term life insurance is not a lifetime contract. Instead, it comes with an expiry date. But if you want, you can renew the policy as it approaches the end of its term.
In fact, most providers include the guaranteed insurability clause in their term life products, which allows policyholders to renew their plan without a medical exam. It is a great feature to have if you develop a medical condition that makes you hard-to-insure or uninsurable. The insurer cannot say no to your renewal request as long as you are below a certain age (usually 80 or 85 years).
However, for people in reasonably good health, the renewable rates are usually exorbitantly high. They are likely to qualify for better rates with other providers. Although a new life insurance application may entail a physical exam, it is worth the effort. You might be able to save hundreds of dollars on premiums by switching providers.
So, if you are in a good shape when your policy is up for renewal, letting your current plan lapse and taking out a new policy could be a smart move.
You can no longer afford the premiums
When you purchase life insurance, you know how much you will have to pay each month or year for the duration of your policy. However, later in life, unexpected events — loss of job, for example — can make premiums unmanageable.
What should you do then?
If you are unable to afford your current life insurance policy, consider replacing it with a cheaper or shorter-term policy.
Cancelling Term Life Insurance
You do not have to do anything to cancel your term life plan. Once you miss a premium payment, the insurer will automatically terminate the coverage after the grace period ends. The grace period is a short period — usually 30 or 31 days — after the premium is due, during which the plan is still active.
You can also cancel your term policy by calling the provider or submitting a cancellation form online. However, some providers may require written notice. To avoid unnecessary delays, make sure your written cancellation application includes necessary details, like the policy number, your name and address, and the cancellation date.
Cancelling Whole Life Insurance
Whole life insurance accumulates cash value and cancelling it is often not as straightforward as stopping the premium payments. The insurer may use the cash value to pay off the missed premiums. So, by the time your policy is cancelled it may have little or no cash value left.
There are much better ways to cancel a whole life policy, such as:
Surrender the policy for its net cash value
The cash value of a whole life policy grows gradually. Once you have built enough of it, you can cash out the policy. That is, cancel the policy to take out its cash surrender value.
A few points to keep in mind when cancelling a whole life policy are:
- When you cancel your policy, the insurer will pay you the cash surrender value not the actual cash value. The cash surrender value is equal to the actual cash value minus any fees or charges.
- If your policy has been in effect for 15 years or more, the cash surrender value is likely to be the same as or very close to the actual cash value. Whole life insurance policies have a predetermined surrender period during which you pay a fee for giving up coverage. This period may vary from one policy to another, but typically it is not longer than 15 years.
- When you surrender (that is, cancel) your policy, your coverage will terminate. Your beneficiaries cannot file a claim after cancellation.
Opt for Reduced Paid-up Insurance
Reduced paid-up insurance is a good option for those who want some life insurance without paying premiums every month or year.
When you opt for this option, the provider will cancel your current whole life policy and use the cash value to fund a paid-up policy. This way you can keep life insurance in place without being required to pay premiums. The face amount of the new policy will be lower than that of the lapsed policy. How much coverage you will get depends on your age and the size of the cash value.
Other options to consider besides cancelling your policy
Finding it hard to afford life insurance premiums and thinking of cancelling it? You may want to consider these options, instead.
- Change your coverage: Most life insurers allow policyholders to lower the death benefit in exchange for lower premiums. Check if this option is available to you.
- Pay off future premiums with cash value: If your policy has been accumulating cash value for years, you may be able to use it to cover future premiums.
- Request for rate reduction: If you quit smoking or overcome a health issue, asking your insurer for rate reduction might be worth it.
Life insurance is a contract between you and the insurer. In return for premiums, the latter agrees to issue a payout to your beneficiary upon death. Because you entered the contract voluntarily, you can also get out of it whenever you want.
Cancelling term life insurance is easy and simple. All you have to do is stop paying premiums. Alternately you can cancel a term life policy online, over the phone, or by submitting a written application. When it comes to terminating a whole life policy, there are some unique considerations, like the cash value and surrender fees. All the same, you can cancel it anytime by informing the insurer about your intentions.
Since life insurance provides your loved ones with financial security, think long and hard before terminating coverage. If your current policy is inadequate or too expensive, Dundas Life can help you. Our life insurance experts will find you a policy that fits your budget and meets your financial goals.