Do you have an old life insurance policy you no longer want?
Whether you are strapped for cash and want to save money or no longer feel you need life insurance, you shouldn’t just cancel life insurance without doing a little research to ensure you get the maximum value.
Some people might think the best way to cancel life insurance is to simply stop paying and let the insurance lapse. Instead of that, you may be able to cancel your policy to get a cash value or sell your policy to get even more.
That’s right. You could actually put money back into your saving account if you take the right approach to canceling your policy.
Let’s look at why someone may consider canceling their life insurance, the right way to cancel life insurance, and what you need to review before you cancel term life or any other life insurance.
How to cancel a life insurance policy
There are many reasons to cancel a life insurance policy. Canceling term and whole life insurance can be complicated, so do some research on your options before canceling. With term life insurance, you may be able to sell your policy through a life insurance settlement for a one-time cash payout.
Why someone may consider canceling their life insurance
There are many reasons someone may consider canceling life insurance. However, canceling a life insurance policy is a serious decision that you shouldn’t rush into.
You probably bought life insurance in the beginning to protect your loved ones. Canceling your policy ends that protection.
With that being said, there are some times when it will make sense to cancel your policy. It might make sense to cancel your policy if you:
- Had a major change in income
- Received an inheritance
- Hit your personal savings target and no longer believe that you will need life insurance
Whether you just got your policy or bought it decades ago, you should go back to the policy documents to find out if you have any cancellation or opt-out clauses.
Everyone’s finances work a little differently, so you may have bought your insurance for a specific purpose and no longer need it. For example, someone may buy a life insurance policy to pay off their mortgage if they pass away.
If the mortgage is paid off early, the life insurance policy is no longer needed. That is a great reason to consider canceling life insurance. This is not the same as mortgage life insurance, which is tied to your mortgage loan balance.
On the converse side, some people may be tempted to cancel life insurance due to a financial strain. If you have trouble making monthly payments, think long and hard before canceling life insurance.
Signing back up for a new policy will likely cost more than your old one due to age. If you can find a way to keep your policy active, it is probably in your best interest. There may be other ways to cut your expenses in retirement without canceling your policy.
Look at life insurance quotes for a new policy for yourself to get an idea of the increased cost of current life insurance rates. Any insurance agent should be able to get you several quote estimates with a quick online form.
Before you cancel life insurance, consider discussing it with your loved ones.
Perhaps you think you don’t need life insurance any longer, but your spouse or another relative thinks keeping it would be worthwhile. Look at all of the pros and cons before you cancel life insurance for good.
Don’t cancel a life policy you own yourself outside of work just because you have group life insurance from your employer. In most cases, the types of policies are not portable, which means you lose them if you leave the company in the future for any reason.
Canceling specific types of life insurance
Most life insurance policies are either a term life insurance or permanent life insurance policy. Each has its own unique features that change what you should do when canceling.
The best life insurance policies may offer a free look period, a short time to review a brand new policy and cancel with no charges. Follow these steps to cancel each type of life insurance respectively:
Cancel term life insurance
This type of life insurance policy may build a small value over time, but that value usually isn’t very significant. If you surrender the current policy early, you can get a small payment in some cases. But most often, you will walk away with nothing.
This is why you should not rush and surrender your policy even if you already plan to cancel. You may be able to sell your life insurance policy for a better value.
Head to this simple form to get an estimate for what you can get if you want to sell your life insurance.
Selling your life insurance for more than the cash value is called a life settlement. You may also be able to find a life insurance settlement where you get a cash payment now and still retain a portion of your death benefit.
Working with a quality life settlement company helps you get the best results from a life insurance settlement.
Cancel whole life insurance (Permanent – Whole Life, Universal Life, Variable Life)
Whole life insurance and other permanent life insurance products build more substantial cash value over time. Since part of your monthly payment is an “investment,” you do get something substantial back when you cancel.
If you stop paying, you may trigger something called nonforfeiture, which should give you a few options on how to proceed. These are sometimes referred to as a permanent policy.
First, you can take the cash value and essentially close the insurance policy. You may also have an option to keep all or a portion of your benefit.
Contact your insurance company if you want to learn more about your options when ending a whole life, universal life, or variable life policy.
Related: read about term vs. whole life insurance policies
Things to review before canceling your life insurance policy
We’ve briefly looked at how a policy is canceled. In this section, we’re going to dive into more details on your options for canceling your life insurance.
These steps are for someone who already decided it is the right time to cancel a life insurance policy. Once that decision is made, it is imperative to do a little research to make sure you get the maximum value in return.
What options exist to cancel?
For a term policy, your options to cancel through your insurer are very limited.
Canceling is also called surrendering your policy in this case. If you simply surrender a term policy, you may not get anything at all other than an end to monthly premium payments.
You would be better off selling your life insurance through a life insurance settlement. In a life settlement, investors take over your premium payments but also get any payout from the life insurance company in the future.
You would do this in exchange for an up-front payment, which could be quite valuable.
In some cases, you may enter into a life insurance settlement where you sell just a portion of your policy. In that case, the buyer would take over a portion of monthly payments in exchange for a portion of the death benefit.
Whole life insurance is more complicated than a typical term life policy due to the big cash value that policies build up over time.
A nonforfeiture allows policy owners to stop making payments while keeping life insurance coverage. This may impact the cash value, so you should contact your insurer to learn more about what you can do.
What are my options for canceling my life insurance policy?
You’ll have many different options for canceling your policy, depending on whether you have a term or whole life insurance policy. We suggest selling your term life insurance policy, rather than surrendering it. Whole life insurance policies differ, depending on the length of the policy.
Cancel life insurance policy the right way
If you are ready to pull the plug on your life insurance, what should you do next? It is important to choose a trustworthy life insurance settlement company to work with when selling.
You may also want to consult with a financial advisor or lawyer to make sure your best interests are protected in the sale process. Also consider checking with your accountant, if you have one, because there may be some tax implications of selling life insurance.
It would be a shame to cancel your life insurance and get hit with a big cash payout just to get a bill from Uncle Sam for taxes due!
There may be a lot of companies out there offering life insurance settlements, but not all of them are upstanding and recognized settlement companies. Reputable businesses are happy to help you effectively cancel life insurance with a settlement that pays you.
If you’ve been paying for life insurance for decades, don’t let those payments go to waste letting your insurance policy lapse. Find a partner that will pay you for your policy. That’s a win-win anyone looking to cancel life insurance can enjoy.