Life insurance is a term which is considered as one of the most important things when it comes to the essentials of living. Life insurance is something which stays with the policyholder and his family even after his/her life. But there are ample of reasons due to which people often want to terminate their life insurance policies.
However, some reasons make absolute sense like paying off loans early or not in a need of a policy to cover the loans or even some people don’t like wanting to spend your monthly premium payments on taking out instead. But the considerations when deciding to cancel life insurance are different whether you have term life insurance or whole life insurance — and the steps to cancel are different, too.
Terminating Your Life Insurance:
When one tends to cancel his/her life insurance policy he/she must know the consequences of doing so. When considering not going on with a life insurance policy here is what happens next:
- Cannot utilize the benefits which use to come along
The most obvious result of terminating your life insurance policy is no longer having life insurance and your family will not receive any death benefit when you die. Once your policy is terminated, your coverage is canceled, no matter if you’ve dutifully paid premiums for years.
- The loss of premium payments:
It is not obvious but you might lose your paid premium and won’t get it back. You won’t get any refund or cash if you cancel your policy or let it lapse if you have a term life policy. However, Whole life policies with cash value may provide some cash when terminated. One more exception is that if you cancel your policy mid-payment cycle, you may be refunded unused premiums, that is, premiums paid for dates between the date of cancellation and the due date of the next premium.
- Reapplying for new coverage:
You forfeit your current rates when you cancel your life insurance policy. You have to take a new medical exam and go through underwriting again, meaning that your rates could be much higher if you decide you want coverage in the future. You will no longer be able to take benefit of lower rates, set when you were younger and (probably) healthier.
Different Ways to terminate a life insurance policy
Terminating your life insurance policy lead to different results depending on the kind of policy you hold. It is either you have a term life insurance or whole life insurance.
Terminating During the ‘Free Look’ Period
You may be able to cancel it without penalty or cost if you’re still within the ‘free look’ period if you immediately regret your life insurance purchase. The free look period can be between 10 to 30 days and is mandated by the state. So it is always advised that one should ask his\her insurer how long your free-look period is or read his/her policy carefully. Any premiums you have paid will be fully refunded if you cancel during the free look period.
Terminating a Term Life Insurance Policy
Here are the two steps through which one can terminate his/her life insurance policy:
- Stop paying premiums:
A usual way of terminating a life insurance policy is not paying the premium within the defined grace period — the mandatory period set by the policy during which one can pay the premium without terminating the coverage — and so the insurance gets terminated. However, that’s not something recommended, but if a policyholder wants to cancel his/her term life insurance policy, it’s that easy: just don’t pay.
- Write a letter:
The policyholder can provide written notice to his/her insurer that he/she’d like to cancel his/her policy. Some policies detail in their contracts that issuing a stop-payment order for the policy holder’s payments is considered written notice, but one can also write a very simple letter.
An example of a term life insurance policy termination letter:
An example of a term life insurance policy termination letter:
Dear insurer (Name),
I’m writing to cancel my policy, effective (Date).
My policy number is 0000000 (Policy number)
Please return any unused premiums to (Address).
Terminating a Whole Life Insurance Policy
Terminating a whole life insurance policy is more complicated than just stopping payments. Each policy has slightly different forfeiture rules, but generally, terminating whole life insurance starts with a call to the policy holder’s insurer. It will depend on how long you’ve owned the policy and your insurer’s rules that what happens next, but there are three general options:
- If possible cash out the policy
The whole life insurance having a cash value is it’s one of the appeals. The first few years of your whole life policy are the ‘surrender period’ that means the exact time length will be set in your policy. If the policyholder cancels his life insurance policy during this period, there will be fees and penalties and there may be no cash value to redeem.
If the policyholder cancels his policy within the first 10-20 years, the cash value of his/her policy may be subject to high fees from your insurance company. And while a life insurance death benefit isn’t taxable income, cash value from a policy that (s)he cancels is taxable. However, this may vary from insurer to insurer or policy to policy. We suggest you read your policy carefully before you go through the process.
- Reduced paid-up option:
A reduced paid-up option, which keeps allows you to stop paying premiums and keep a reduced death benefit on your whole life policy will be offered by a few insurers.
- Let the life insurance policy lapse:
Few insurers will automatically cash out your whole life policy if the policyholder stops making payments. Other insurers will let the policy lapse, in which case (s)he may be able to reinstate it within a set period. The policyholder will like to have to go through underwriting again, but the cost could be less than buying a new policy and to pay back the premiums.
How an Insurance Company Cancel a Life Insurance Policy
The conditions in which an insurance company can cancel a life insurance policy are very specifically detailed in the policy itself. Conditions in which cancellation may take place from insurer’s side include:
- Non-payment of premiums:
If the policyholder doesn’t pay his/her premiums within the grace period, his/her policy will be terminated automatically.
The first two years that in which a policy is in force is called the contestability period. During that time, the insurer reserves the right to investigate policy holder’s cause of death and to cancel his/her policy if it finds that (s)he lied on his/her application.
Any insurance company cannot cancel any policy for any other reason, including if the policyholder gain weight, start smoking, develop a dangerous hobby, or get sick.
Terminating a Group Life Insurance
There is an exception in which a group life insurance policy can be terminated by an employer at any time that is if they choose to stop offering coverage to their employees. Also, the employee’s coverage through the group policy will terminate when (s)he leaves his/her job, unless (s)he converts it to an individual policy, which may be a possibility.
Reasons to Cancel Life Insurance
There are many reasons that people may consider terminating life insurance. Few of those are:
- The policyholder is no longer in need of it. For example, the policy holder’s kids are out of school, or his/her mortgage is paid off
- Cannot afford the premiums
- Buyer’s remorse
- The policyholder wants to separate his/her retirement investments from his/her life insurance (whole life only)
- The policyholder wants to access the cash value portion of his/her policy (whole life only)
- The policyholder has found life insurance coverage at a better rate, either because of industry-wide price drops or because his/her health has improved….Read more>>