Canceling Life Insurance (2024)

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• If you cancel or outlive your term life insurance policy, you don't get money back.
• However, if you have a "return of premium" rider and you outlive the policy, premiums will be refunded.
• If you have a convertible term life policy, you can sell it instead of canceling it.

According to Lucas Siegel, CEO of Harbor Life Settlements, 85% of life insurance policies lapse — meaning the insured individuals outlive the policy or stop paying. If you cancel your term life insurance or you outlive your policy, you won't get your money back unless you add a "return of premium" rider. However, if you surrender a whole life insurance policy, you'll likely pay fees and taxes.

How to cancel your life insurance policy

Canceling a term life insurance policy

There are several ways to cancel a term life insurance policy. You can:

• Stop paying your premiums and let your coverage end
• Wait until the term ends and allow the policy to expire
• Let your insurance company know of your intent to cancel via phone call or mail

Be aware that canceling your term policy means you won't get any refund and lose your death benefit. However, if you opted for a return of premium rider when you bought your policy, your insurer will return a portion or all of the money you've paid if you haven't used the policy once your term ends.

Surrendering a permanent insurance policy

Surrendering or cashing out your policy before you die is a way to end your permanent life insurance policy. However, liquidating your policy's cash value means you lose life insurance protection and may be subject to surrender charges and taxes.

Your cash surrender value, or the amount you receive if you surrender your policy, is equal to the amount of cash value built minus any surrender charges. This penalty fee typically decreases over time.

In addition to surrender charges, you may owe income taxes on the proceeds if the surrendered cash value exceeds the premiums you've paid into the policy.

Reasons for canceling

Financial changes or constraints

If you can't afford your premiums, canceling life insurance may be your only option. Before giving up your policy, consider cutting down on non-essential spending like eating out or streaming subscriptions.

It may also be helpful to evaluate your insurance portfolio. You may be overpaying for insurance in one area, such as your home or auto policy, causing financial strain in the life insurance department. Consider taking a look at Business Insider's guide to comparing car insurance and comparing homeowners insurance quotes to help you find the best deals on your policy.

Policy no longer meets needs

As your children become adults and move out or you pay your mortgage off, your life insurance needs decrease. You may not even need life insurance at all. Prior to canceling your policy, consider anyone who may still depend on you for financial support, such as a non-income-earning spouse or a lifelong adult dependent.

Finding a better-suited policy

If you can afford higher premiums, you may decide to switch from a term policy to a permanent policy. This type of policy has a cash value component, which allows you to increase its value over time. You can use your earnings to increase your retirement fund, save for long-term care costs, or build an inheritance for your children.

However, life insurance policies tend to yield subpar returns compared to other investments. So, if you have no financial obligations, carrying a policy may not be worth the cost.

Considerations before canceling insurance

Financial impact of insurance cancellation on dependents

Whether you cancel your term policy or surrender your permanent policy, ending your coverage means your beneficiaries won't receive death benefits when you die. This could mean your dependents will be without financial support for day-to-day expenses, debt, and other financial obligations.

Loss paid premiums

Unless you have a return of premium rider, you won't get a refund on your premiums if you decide to cancel or your coverage ends.

Cost of cancellation

If you cancel a permanent life policy and cash out its funds, you may be subject to surrender fees and taxes on the withdrawn amount.

Alternatives to life insurance cancelation

canceling your life insurance policy isn't ideal if you have dependents who rely on your income for financial support. Even if that isn't the case, you still lose money by paying premiums and not using your policy. Before canceling your policy, consider the following alternatives to preserve your policy or recoup your paid premiums.

Lower your coverage amount

If you're struggling to afford your insurance premiums, consider lowering your coverage amount. While a reduced amount may not be enough to subsidize your dependent's needs if you pass away, some coverage is better than none. Most insurers allow you to request a decrease at least once during your coverage period.

If you have a whole life insurance policy, look into reduced paid-up life insurance. This option lets you stop paying premiums and instead use your cash value to purchase a policy with a reduced death benefit.

Use your cash value to cover premiums

You can use the cash value you've earned on your permanent policy to cover your premiums until you can afford them. Just be sure your cash value doesn't go below the minimum required amount (usually equal to your premium amount and any other policy fees), so your policy doesn't lapse.

Retake your medical exam

If your health or lifestyle (i.e., you quit smoking or avoided a high-risk hobby) has improved at least a year since your last medical exam, ask about retaking your medical exam. You may qualify for a lower-risk class hence, more affordable premiums.

Tax-free exchange

canceling a permanent life insurance policy can result in you paying taxes on the surrender amount. If your life insurance policy doesn't suit your needs (e.g., if you want a policy that offers lower premiums or better investment options), you can exchange it for a new policy without incurring tax liabilities on any investment gains.

The Internal Revenue Service permits this transaction under the 1035 exchange (also known as a like-kind exchange). If you're considering this transaction, it's best to consult a tax professional, as it's a complicated process.

Selling your policy

There are two ways you can sell your life insurance policy: (1) a viatical settlement; and (2) a life insurance settlement. They each have different requirements. For a viatical settlement, the insured individual must have a terminal medical diagnosis. However, a life insurance settlement doesn't.

In each instance, the policyholder forfeits their right to a death benefit. Therefore, if you need to leave money to your family, this might not be a good option.

Viatical settlement

A viatical settlement is when an insured individual with a terminal diagnosis is paid the death benefits from their life insurance policy.

Siegel gave the example of a cancer patient with a $1 million term life insurance policy who was struggling to afford medical treatment. If he simply canceled the insurance policy, he wouldn't have received any money. However, Harbor Life Settlements offered him $600,000 for his term life policy.

Life insurance settlement

If you don't have a terminal diagnosis and you want to sell your term life insurance policy, you can apply for a life insurance settlement with a third-party provider instead of canceling your policy. Siegel said policyholders who have convertible term life insurance—a policy that can be converted to permanent life insurance—typically qualify for life insurance settlements.

Consulting an insurance expert

Depending on the type of life insurance you have, canceling your policy can be complicated.

Once you sell your term life insurance, you lose all rights to the policy, specifically the death benefit. If your family needs the death benefit, this may not be the best option for you. However, if your family is financially comfortable on their own and doesn't need the death benefit, then it may work for you.

It's wise to consult an accountant, estate attorney, or financial advisor about your financial situation and goals to determine what is best for you and the tax implications. It's worth taking the time to find the best option for you because once you've sold your policy, you lose that coverage.

Canceling life insurance FAQs