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How to Cancel a Life Insurance Policy the Smart Way

cancel life insurance policy

What happens when you cancel life insurance? Unfortunately, that’s not a simple question to answer. Your coverage might end immediately, or it might not. Plus, you may or may not receive a refund of the premiums you’ve paid. These details hinge on the type of policy you have and how long you’ve had it. 

You might be inclined to accept those consequences as they are, but you actually don’t have to. There are other ways to manage an unwanted life insurance policy, outside of cancellation. That’s why it’s critical to understand how a cancellation affects you financially — because only then can you compare your options and choose the approach that’s most lucrative.

Use this guide as a reference for canceling life insurance, either term or permanent coverage. Read on for the details about whether you can cancel, what happens when you cancel, how to go about canceling, as well as alternative strategies to consider. 

Can you cancel a life insurance policy?

You can cancel a life insurance policy at any time, but you may have to pay fees if you’re canceling after the free look period. The free look period is usually 10-30 days starting after you sign your contract, and it allows you to back out if you change your mind and want a different policy type or even a new policy from a different insurer. The length of time you have for your free look period depends on the state you live in, so check your contract for specific details. If you do cancel your policy within the free look period, you’ll be refunded for any premiums you’ve paid to the insurer.

What happens when you cancel a life insurance policy

You can rely on two outcomes when you cancel any life insurance policy. One, your insurer will stop billing you for premium payments. And two, if you die after the policy is cancelled, your beneficiaries will not receive the death benefit. 

Beyond that, policy cancellations can get complicated if the policy’s “free look” period has expired. The free look period is something like a rescission window. It can last from 10 to 31 days after you initiate coverage, depending on the insurer and where you live. During that time, you can back out of the life insurance and receive a full refund of any premiums paid. The insurer will void the contract as if you’d never purchased the insurance at all. 

After the free look period closes, your policy is subject to the normal cancellation rules and procedures. Term life insurance cancellations are generally straightforward, while permanent life insurance cancellations are not. We explain these differences in detail below. 

Know, too, that many insurers allow you to reinstate a policy that’s no longer in force by paying any past-due premiums. Reinstatement, however, is not a legally mandated option; it’s up to the insurer to decide whether to honor your reinstatement request. 

What happens if you stop paying insurance premiums 

Life insurance policies usually have a grace period of 30 to 60 days. The grace period follows your premium due date. If you are late on a premium payment, you can catch up without consequence during the grace period. If you don’t catch up, your policy status changes once the grace period expires.

On term life insurance, your policy lapses at the end of the grace period if you haven’t made a payment. Lapsation means your policy is no longer in force. It is essentially cancelled. 

A missed premium payment works differently on permanent life insurance. If the payment is still outstanding at the end of the grace period, the insurer will withdraw funds from the policy’s cash value account to cover the premiums. The coverage will remain in force until the insurer consumes all of the cash value. 

What happens if you tell the insurer to stop coverage

If you don’t want the insurer to use your cash value to maintain your permanent life coverage, you can cancel the policy outright. This is more commonly known as surrendering the policy. The insurer will close your cash value account, end your coverage, and refund the policy’s “surrender value” to you. The surrender value is equal to the accumulated cash value less any termination fees, also known as surrender fees. 

How to cancel a term life insurance policy

There are two ways to cancel term life insurance. Many insureds will just stop paying the premiums, which results in cancellation once the grace period ends. But the better approach is to call your insurer and verify a few details first. To start, confirm that your coverage is actually term life and that you have no cash value. 

Then, find out if you can convert your term policy to permanent coverage and what the cost would be. If you’ve been paying term life premiums for years, it may make sense to convert to permanent life where you can build cash value. That positions you to get some return on your investment at some point.

How to cancel a permanent insurance policy

Cancelling (or surrendering) permanent life insurance demands a more strategic approach. This is because you have several moving parts to consider: cash value, surrender fees, taxes, and even alternative ways to get rid of your unwanted policy.

Surrender fees are likely to be a deciding factor. These are often very high in the early years of your policy and then gradually phase out over time. On a younger policy that hasn’t had time to build up significant cash, the surrender fees can be high enough to consume all of your cash value. If that happens, you’ll get no refund for cancelling the policy. 

On an older policy that has value from a high cash balance, you may receive a cash payout after the insurer deducts its surrender fees. To the extent those proceeds are more than what you’ve paid cumulatively in premiums, they may be taxable. 

To get a handle on these details, ask your insurer to estimate your policy’s surrender value, or the amount you should get for terminating your coverage. With that number in hand, you can compare a cancellation to the alternatives below.

Smart alternatives to canceling life insurance coverage

To recap, cancelling term life insurance provides no cash proceeds at all, unless you’re within the free look period. You may get a small sum for cancelling your permanent life coverage, but only if the accumulated cash value is more than your surrender fees. 

The good news is that there are other ways to recoup value from an unwanted insurance policy. Here are two of them that may suit your needs.

1. Perform a tax-free 1035 exchange

A tax-free 1035 exchange is a replacement of an old life insurance policy or annuity that has no tax consequences. The IRS allows this type of exchange so you can easily replace life insurance policies and annuities that no longer match your financial situation. For the transaction to qualify as a 1035 exchange, the insurer has to move the funds from one contract to another behind the scenes. If you accept any surrender fees or cash payments from the old policy, the transaction will be taxable. 

A tax-free 1035 exchange is a good option when you still want life insurance, but you need something different than the policy you currently have.  

2. Sell the policy through a life settlement

Many term and permanent life policies can be sold for cash in a life settlement. A life settlement transfers your policy, along with the cash value and death benefit, to a new owner. In return, you receive a lumpsum of cash that you can use for any purpose (though a portion of the proceeds may be taxable). Once the transaction closes, that new owner pays the premiums. 

The value of your life insurance in a life settlement is always more than the policy’s cash value or surrender value. Depending on the details of your coverage, your life insurance may be worth up to 60% of the death benefit. This makes the life settlement a great option if your goal is to maximize the cash return from your life insurance.

Before you cancel or surrender a term life or permanent life insurance policy, contact Harbor Life Settlements to find out if you are eligible for a life settlement. The Harbor Life team will also provide a free quote on your policy’s value. You can then compare that value to the surrender amount quoted by your insurance company. If you want an idea before reaching out, try our free life settlement calculator for an instant estimate.

Catherine Brock

Catherine Brock

Catherine Brock is a personal finance writer who's been featured in The Motley Fool, Refinery29, and has made appearances on ABC7 Chicago, FOX2News St. Louis, KCAL9 Los Angeles, Fox19 Cincinnati, WGN TV Chicago and WCPO TV Cincinnati. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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