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How do I cancel my life insurance policy?

Do you prefer to learn by watching? We answer this question in a video below. Click here to jump ahead.

As a life insurance policyowner, you can cancel your life insurance policy at any time.
Common reasons as to why someone would want to cancel their current policy:

  • they simply no longer need it;
  • they are replacing it with a new life insurance policy.

The type of life insurance policy you’re canceling, whether term life insurance or permanent life insurance, will make a difference as to how you cancel it and what happens.

» Calculate: Life insurance needs calculator

Canceling a Term Life Insurance Policy

Canceling a term life insurance policy is relatively straightforward. There are no fees to cancel a term life insurance policy. You simply stop paying the premiums and your coverage will lapse, ultimately terminating the policy.

If you go the route of just ending payments, you’ll likely receive notices in the mail from the insurance company informing you that your policy will soon lapse due to nonpayment. If you change your mind, you have the grace period (typically within 30 days after the due date) to pay the premium and keep your policy active.

Another route to go is to call the insurance company and inform them you want to cancel your policy. If you pay a different mode other than monthly (annually, quarterly, or bi-annually) you will want to do this instead so you can request a refund of the unused premium. Some insurance companies require this request to be in writing. The insurance company may ask you to write a letter or fill out a surrender form in this case.

Note: If you set-up automated payments be sure to take the appropriate steps to stop these. Most insurance companies allow you to set up ACH payments, also called electronic fund transfers (EFT), so you don’t need to worry about forgetting to make a premium payment. With this method, the insurance company withdraws premium payments directly from your checking account. In this case, you will need to contact the insurance company directly to end the payments. Sometimes the bank needs to contacted as well.

Canceling a Permanent Life Insurance Policy

Most types of permanent life insurance, like whole life insurance or universal life insurance, build up cash value within the policy. There are laws in place that allow a policyowner to claim a fair share of this value if they decide to cancel their policy. These are nonforfeiture values. Term life insurance policies do not build cash value so this law is irrelevant for term insurance policyowners.

There are more moving parts involved with a permanent policy (versus term) so if you want to cancel it, don’t just stop paying the premiums.

Surrender Fees/Charges

Life insurance companies invest premiums from permanent policies in long-term investments. Because of this they implement surrender charges to policies cancelled after a short period of time. This surrender charge is determined by how long the policy has been active. It typically begins at 100% of the value for the first year and steadily declines until it disappears altogether after 10 or 20 years. After this period of time, you can surrender the policy with no fee. These surrender charges are explained in detail in your policy.

» Learn more: Can I Sell My Life Insurance Policy?

Income Tax

If you cancel (surrender) your permanent life insurance policy for the policy’s cash value, any money you receive from the insurance company plus any cash benefits you may have already received such as dividends, loans, or withdrawn cash minus total premiums paid on the base policy will be taxed as ordinary income. Money out minus money in, if positive, equals taxable income.

There are many reasons you may want to replace your life insurance policy with a new one. You may want to take advantage of the historically low rates; your health is better now than it was then; your insurance needs have changed. Whatever the reason, don’t cancel your current policy until your new one is inforce (active).

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Canceling a Life Insurance Policy Because You No Longer Need It

As a policyowner, it’s your right to terminate your life insurance policy at any time. However, keep in mind that life insurance premiums increase as you get older and any health issues would also impact the premiums of new policies. So, if you need life insurance later your premiums will be more expensive than your current policy. Not to mention a new medical exam would be required.

If you need to cancel your policy because you’re struggling to pay the premiums, call the insurance company. Some allow you to change the coverage amount during certain time periods. Ask them if it’s possible to decrease the face amount and they will be able to tell you what your new premium would be. Having a little life insurance coverage in place is better than none if your family ends up needing it.

Canceling a Life Insurance Policy Because You’re Buying a New One

There are many reasons you may want to replace your life insurance policy with a new one. You may want to take advantage of the historically low rates; your health is better now than it was then; your insurance needs have changed. Whatever the reason, don’t cancel your current policy until your new one is inforce (active).

» Compare: Term life insurance quotes

When you’re applying for the new life insurance policy, on the application you will be asked if you currently have any active life insurance in your name and if you are planning on replacing this policy with your new policy. (You do have the option of owning more than one policy as long as you’re not over your insurability limit.) The image below shows what Quotacy’s online application asks.

screenshot of Quotacy's online life insurance application showing policy replacement

Knowing that you can own more than one policy at a time, if you still want to cancel your current one, call the insurance company and tell them you want to terminate the policy. But, again, we recommend that you don’t cancel the policy until your new one is 100% inforce and you’ve reviewed it.

Also be aware that with a new policy you do have a new “contestability” and suicide period. When you bought your first life insurance policy, it likely came with a two-year “contestability” period in which the insurance company could investigate the accuracy of your life insurance application and decline paying the death benefit if they find anything amiss. After the “contestability” period is over, the insurance company loses this opportunity.

A new life insurance policy would have a new “contestability” period. The same with the suicide clause period. If suicide is the cause of death within a two year period after issue of the policy (one year in some states), the claim would not be paid. New policies start this suicide “contestability” period over again. (Most term conversions to permanent polices retain the original “contestability” periods.)

Canceling life insurance policies and replacing life insurance policies are commonplace. Contact Quotacy if you want a new life insurance policy and are not sure what to do about your current one. And finally, the last thing you should do if you cancel a life insurance policy is inform your beneficiaries you are doing so. It would be awful if you were to die and then your family discovered you no longer had life insurance.

Another suggestion is to destroy or return to the insurance company the actual policy that is cancelled. If death would occur and your heirs found the insurance policy that you cancelled, they may think it was still “inforce”. This will cause loss of time and anguish over investigating the status of the policy.

 

Watch the How to Cancel My Life Insurance Policy Video

Video Transcript

Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance broker where you can get life insurance on your terms.

I’m Jeanna and I’m Natasha.

Today’s question is:
 
How do I cancel my life insurance policy?

 
 
The type of life insurance policy you have, whether term life insurance or permanent life insurance, will make a difference as to how you cancel it and what options you have.

Canceling a term life insurance policy is pretty straightforward. And there are no fees to cancel a term policy. If you pay monthly, just simply stop paying the premiums and the policy will lapse which ultimately terminates it. When you stop paying you will receive notices stating that your policy will lapse due to non-payment. If you change your mind and want to keep your policy you have a grace period to pay the premium and keep your policy active.

If you pay annually, quarterly, or biannually call the insurance company and tell them you want to terminate the policy. This way they know to send you a refund of any unused premium. If you set up automated payments, make sure to contact your bank and take the appropriate steps to stop the drafts from your checking account.

Canceling a permanent life insurance policy, such as whole life or universal life, is a bit more complex. Don’t simply stop paying the premiums.

Most types of permanent life insurance build-up cash value within the policy and there are laws in place that allow a policyowner to receive a fair share of the policy’s value if he or she decides to cancel it. However, unlike with term life insurance, there may be a charge to cancel a permanent policy.

When you buy a permanent life insurance policy the insurance company puts a portion of your premiums in long term investments. Because of this, they implement surrender charges to discourage policyowners from canceling their policies. The surrender charge is determined by how long your policy has been active. This charge typically starts at 100% of your policy’s value for the first year and steadily declines until it disappears altogether, typically after 10 or 20 years.

For example, if you buy a permanent life insurance policy that builds cash value and you cancel the policy within the first year, you lose out on receiving any share of the value since the surrender charge is 100%.

Another example would be if you buy a permanent life insurance policy that builds cash value and you decide to cancel it ten years later with a 25% surrender charge, then you only receive 75% of your policy’s value. Surrender charges vary across companies and will be explained in detail in your policy.

Another potential issue with surrendering a permanent policy for cash would be income tax.

When you cancel the permanent life insurance policy for its cash value the amount may become taxable income if this amount plus any cash benefits you may have already received over the life of the policy, such as dividends, loans, or withdrawals, is greater than the amount of premiums you’ve paid thus far.

Surrender cash value taxation for Quotacy blog How do I cancel my life insurance policy?

As a policyowner it’s your right to terminate your life insurance policy at any time. However, keep in mind that life insurance premiums increase as you get older. And any health issues would also impact the premiums of any new policy you may later on decide to get.

If you need to cancel your policy because you’re struggling to pay the premiums call the insurance company. Some allow you to change the coverage amount during a certain time periods. Having a little life insurance coverage in place is better than none if your family ends up needing it.

» Compare: Term life insurance quotes

Another reason a policyowner may want to cancel their policy is because they are replacing it.

There are many reasons one would potentially want to replace a life insurance policy. You may want to take advantage of historically low rates; Maybe your health is better now than it was when you first purchased the policy; or maybe your insurance needs have changed.

reasons why you might replace your life insurance policy

Whatever the reason, don’t cancel your current policy until your new one is 100% active.

When you’re applying for the new life insurance policy on the application you will be asked if you currently have any active life insurance in your name and if you’re planning on replacing this policy with your new policy. If you plan on replacing it, once your new policy is active, call the insurance company and tell them you want to terminate the policy.

» Calculate: Life insurance needs calculator

Cancelling and replacing life insurance policies happens all the time. Reach out to our agents at Quotacy if you want a new life insurance policy and are not sure what to do about your current one.

The last thing we want to talk about today is your policy’s beneficiaries. If you plan on terminating your life insurance policy don’t forget to tell your beneficiaries. It would be awful if you were to die and they think you still have an active life insurance policy when you don’t.

Another suggestion is to destroy or return the policy to the insurance company. This way your beneficiaries don’t stumble upon it and think it’s still active. This could cause loss of time and anguish over investigating its status.

If you have any questions about life insurance, make sure to leave us a comment. And if you’re ready to get quotes, check out Quotacy.com. We’re here to help you find the best deal on the life insurance you want.
 

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius

Marketing Content Manager

Natasha is a writer and content editor at Quotacy. She is also co-host of Quotacy’s YouTube series. She can't get enough of life insurance and outside of work is also working toward her Chartered Life Underwriter designation. Connect with her on LinkedIn.