Life insurance ensures your family will have the financial support they need when you are no longer around. However, being stuck with the wrong life insurance coverage or a plan that you no longer require can cause quite a few problems while you are still alive.
Whether your policy is 10 days old or 10 years, we will show you how to easily get out of it.
Keep reading to find out how to cancel a life insurance policy that you no longer need.
Why Someone Might Cancel Their Policy
There are lots of reasons why policyholders might want to end coverage. The three most common reasons are:
They no longer require coverage
Most people buy life insurance to protect their children or cover large debts or both. Once the children become financially independent and debts are paid off, canceling coverage might be a good idea.
Loss of income
Life insurance, while necessary for most, is not always cheap. And when times are tight, some people might be tempted to cancel coverage to reduce monthly expenses. With that said, there are better ways to cut spending. Switching to a policy with a shorter term or a lower death benefit can also reduce the monthly bills.
Even if terminating a policy seems like a good way for someone to reduce their expenses, doing so can have severe repercussions. Without the protection offered by life insurance, in the event of an unexpected death, their loved ones may have to shoulder unpaid debts and uncovered medical bills.
In short, having some life insurance is better than none. If you cannot afford your current plan, look for cheaper options instead of going without life insurance.
They have found a better policy elsewhere
Some policyholders cancel their life insurance because another insurer promises them a better rate. Switching life insurance policies can be a smart way to save money or boost your coverage without increasing the costs.
How to Cancel Your Life Insurance Policy?
Canceling a life insurance policy is not complicated. However, the exact steps vary depending on whether you have a term life policy or a cash-value life policy.
Term life insurance is the simplest and purest form of life insurance, providing coverage for a certain period in exchange for premiums. These policies do not include a savings component, but cash-value life insurance plans do.
Cash-value life insurance serves two purposes. One, it provides coverage for as long as you live. Two, it accumulates wealth (cash value). Whole life and universal life are an example of cash-value life insurance policies.
Whether you have a term life policy or cash-value life policy, there are plenty of ways in which you can cancel coverage.
Term Life Insurance
You can cancel a term life policy in different ways. Whichever option you pick, make sure you cancel any automatic payments that you have arranged with your bank.
- Submit a cancellation form. Some insurers let you do this online; others require you to mail back or fax the completed cancellation form.
- Write a letter. Send a written notice to the insurance company stating that you would like to cancel the coverage. The letter should contain your address, name, and policy number; the cancellation date; and the policy number.
- Call your provider. Some Canadian life insurers let you cancel a policy over the phone. Have your policy details handy to avoid any unnecessary delays.
- Stop paying premiums: Canceling a term life plan can be as easy as stopping the premium payments. If you do not make a premium payment within the grace period, your policy lapses automatically. A grace period is a small window you get after the due date in which you can pay the premium without coverage lapsing.
Cash-value Life Insurance
Whole life insurance policies build wealth as well as providing lifetime coverage. The same is true for universal life insurance, except it offers more flexibility than the former. Because of the in-built savings component, canceling these policies is not as easy as stopping paying premiums. All the same, it is not complicated either.
You can cancel a universal life or whole life insurance policy in any of the following three ways:
Surrender the policy for its net cash value
As we mentioned before, whole life and universal life plans include a savings component. A policy’s cash value grows over time on a tax-deferred basis. Once your policy has been in force long enough, you can cash it out. That is, you can surrender the policy for its net cash value.
A few things to keep in mind:
- Surrendering a cash-value life policy is the same thing as canceling it
- When you surrender (that is, cancel) the policy, you will receive its net cash value, not the actual cash value. The provider will deduct any surrender fees from the actual cash value
- If you have had the policy for more than 15 years, the net cash value (that is, the amount you will receive) is likely to be very close to the actual cash value. Policies have a surrender period during which the insurer will charge fees if you give up coverage. The surrender period may vary by insurer, but is rarely more than 15 years
- Your coverage will end
Go for the Reduced Paid-up Insurance
If you no longer want to pay premiums but would still like to have some amount of insurance protection, consider reduced paid-up insurance.
The insurer will cancel your existing policy and use its cash value to fund a new policy with a guaranteed death benefit. Since the new policy is paid up, you will not have to make any premium payments. Though remember, the payout will be lower than what the original policy offered.
How much lower? That depends on your age and how much cash value is there.
This option, like others on the list, comes with a fee. Not all insurers offer the reduced paid-up option. So, call your provider to check if it is available to you.
Let it Lapse
You can cancel your policy by stopping premium payments. If you have a cash-value life plan and stop paying premiums, some providers will cash out the policy and end the coverage. Others will use the cash value to cover premium payments.
When the cash value is exhausted, the coverage ends. However, if your policy had insufficient cash value to begin with, it will automatically lapse once the grace period for a premium payment ends.
Whether your insurer automatically cashes out the policy and lets it lapse or uses its cash value to fund premiums until it runs out, you can face surrender fees and taxes.
When to Cancel Your Life Insurance Policy?
A life insurance policy is a legally binding contract between you and the insurer. In exchange for premium payments, the provider promises to pay a death benefit to your beneficiary when you pass on. Since you entered into the contract voluntarily, you can also get out of it any time you want and for any reason. You can cancel your policy after five minutes, five years, or at any other time after buying it.
All the same, canceling a life insurance policy makes more sense at certain times than at others. For example, one good reason to end the coverage is that you no longer need it. If your dependents have become financially independent, there may be no point in continuing with your existing policy. Likewise, you may want to terminate the existing policy if you are getting a better rate elsewhere.
What about canceling coverage because you cannot afford the premiums? If you can no longer pay the premiums, you may want to cancel the policy and go without life insurance. When the going gets tough, the first decision can make sense, but going without any life insurance does not.
Even if your financial situation is not what it used to be, you are likely to find a policy that fits your current budget. For example, say, you are paying $510 a year for a 30-year term life policy of $5 million. But now you find the annual premium is beyond you. That said, instead of going without life insurance and putting your family’s financial future in jeopardy, consider buying a cheaper policy, like a $5 million policy with a shorter term (say, 10 years) or a 30-year policy with a smaller death benefit (say, 3 million).
While you can cancel coverage whenever you want, the provider does not have the same freedom. Insurance regulations dictate that an insurer can cancel coverage only in two cases:
- Fraud: If the insurance company finds out that you lied or withheld information while applying, it can cancel the policy. The insurer can do so even if the contestability period is over. This is a small window, usually two years, during which the carrier can investigate the cause of your death.
- Non-payment of insurance premiums: If the policyholder does not make a premium payment within the grace period, you will lose coverage. Generally speaking, the grace period is 30 or 31 days long.
Will You Get Money Back Once You Cancel Your Policy?
Whether you have been making premium payments for one year or one decade, you have put a large amount of hard-earned money into it. Would you receive any of it when you cancel the coverage? It depends.
Term life policies do not come with an investment account. So, these policies do not have a surrender value. As a result, there are only two situations in which you can receive a cheque when you cancel this type of policy.
- You cancel the policy during its free-look period: Life insurance policies generally include a free-look period. It could be anywhere between 10-30 days. If you cancel the policy before the free-look period ends, the provider will refund your first premium payment.
- You cancel the policy in the middle of its payment cycle: When you cancel mid-payment cycle, the provider will refund the premium that has not yet been applied to your policy. For example, say, the annual premium you pay is $420 and the billing cycle is from January to December. If you cancel the policy in February, the insurer will refund the premium for March to December.
If you have a whole or universal life plan, you will get part of your money back in one more situation — when it has accumulated enough cash value.
Since cash value accrues gradually, it takes some time before the policy has any surrender value. The surrender value of a life insurance policy refers to the amount of money you get when you cancel the coverage. It is calculated using the formula: cash value – surrender fees.
In short, you will get some money back when your policy’s cash value is more than the surrender fees.
You can cancel your life insurance policy at any time, for any reason. Unless your policy had cash value or you cancel it during a free-look period or in the middle of a payment cycle, you will not get any of your money back. Should you pass away, your loved ones will be left with no cover to help with things such as burial costs, outstanding bills, living expenses, etc. Therefore, we advise you think twice before canceling coverage.
However, if you want to end coverage because your policy is too costly or not suitable for your needs, Dundas Life can help you. We work with leading Canadian life insurers and can find you a policy that best suits your budget and financial goals.