Things You Should Know Before Cancelling Your Life Insurance Policy

Things You Should Know Before Canceling Your Life Insurance Policy

Life insurance can be a tricky thing. Most people — 84 percent, in fact — believe lifetime coverage is important, yet only 59 percent of Americans actually own a life insurance plan. The reasons for not having life insurance vary. First of all, it’s sometimes difficult for the average person to know the type of coverage or how much life insurance they need for their entire life, let alone how much coverage they should buy. For others, the whole life insurance process and obtaining life insurance quotes is just a hassle. But for the majority of non-policyholders, monthly insurance premiums just don’t seem to fit into their final expenses budget.

Interestingly, these are some of the same concerns that lead life insurance policyholders to cancel the policies they’ve already purchased. A lack of understanding about the type of life insurance they actually own and the financial burden of monthly premiums are two of the leading reasons for policy cancellations. For other policyholders, their motivation is that they believe they simply don’t need the policy anymore, perhaps due to changes in their family or financial circumstance since they first purchased it.

If you’ve thought about canceling your life insurance policy for whatever reason, there are several incredibly important facts you should know before you cash in or stop paying premiums to your life insurance company .

Consider the consequences

Before you start spending your monthly life insurance premium on something else, whether it’s past-due bills, estate taxes, credit card debt, or food delivery and other expenses, take a moment to consider the complete details of what will happen when you do indeed lose your life insurance coverage.

The first, most obvious result is the sale guarantees that your beneficiaries will no longer receive a death benefit when you pass away, regardless of the years of the policy that have been paid off. Your death benefit with a life insurance policy is its face value, or the payout your family members, loved ones, or other beneficiaries would receive in the event of your death. The payout amount could actually be higher with certain policies and in certain scenarios. For example, your policy may have an accident clause that doubles the death benefit if you die in an accident, though exclusions may apply. If you cancel your policy before you die, there will be no payout.

Some people purchase a lifetime of life insurance protection so the proceeds can be used to pay off any outstanding financial obligations, like a mortgage or credit card debt. Others have policies specifically designated to pay their funeral expenses or treatment expenses following certain medical conditions. Still, there are individuals who want their policy payout to go to their children as an inheritance, or to their spouse as a financial safety net. These are all very personal and practical motivations that should be considered before canceling a policy and forfeiting these benefits.

Another consequence of cancelling that some people don’t ever think about is future insurability. Perhaps you have reasons to cancel your policy now, but at a later date, you decide maybe that wasn’t the best idea, after all. If you need to purchase a new policy, the insurance company will probably consider your age and medical history before deciding on your premium amount, coverage amount, or even if they can insure you at all. You may even have to undergo a medical exam to obtain proof of insurability, or prove that you’re in good enough health for the insurance company to cover you. If you’re approved, you’re much more likely to pay significantly higher premiums. These are all possibilities that shouldn’t be overlooked when you’re weighing your life insurance options. .

The type of policy matters

Another consideration in deciding whether you should cancel your insurance policy or not is the type of life insurance policy you currently hold. There are typically two basic categories: Permanent life insurance and term life policy .

Permanent life insurance is often referred to as “whole life” insurance, although a whole life policy is just one of several kinds of permanent policies, including universal life insurance. Permanent life insurance policies have no definite time period of coverage or certain number of premium payments to be made. They are designed to be paid until the insured’s death, and premium amounts never increase. Additionally, a certain type of permanent life insurance comes with a savings component. Savings gain tax-deferred cash value throughout the life of the policy. These gains will be paid along with the death benefit. Some permanent coverage even offers dividends.

Term life insurance is issued for a specific period of time — usually 10, 20, or 30 years. Term policies are fairly straightforward; if the insured dies at any time during the life of the policy (and premiums have been paid as expected), the beneficiaries receive the entire face value, or death benefit. Because the policy doesn’t include cash value like a permanent policy, term life insurance premiums are more affordable. At the end of the designated term, all coverage ends. Of course, most policies have the option for renewal for a new term.

Ways to cancel a policy

In addition to providing varying benefits while in force, the differences in permanent insurance and term life will also come into play if you decide to cancel.

Term life, again, is straightforward. If you want to cancel your policy, simply stop paying your premiums. Your policy will lapse, you will forfeit the premium payments you’ve already made. There will be no coverage for the insured or death benefit for the beneficiaries. Another option for canceling a term insurance policy is to write a simple letter to the insurance company notifying them that your wish to cancel.

The actual process of cancelling permanent insurance isn’t necessarily more complicated than canceling term life; you just have to decide from more options — and that can be overwhelming. Each insurance policy will differ slightly in the details, but your insurance agent will be able to explain exactly which options are available for your particular policy.

The period of time you’ve paid on your policy is one of the most important factors affecting your cancellation. The first few years of a policy are a “surrender period” during which you can cancel the policy, receive little to none of the cash value your policy may have accrued, and incur penalties or fees.

If you’d paid on your permanent policy for a while, you should be entitled to receive some or all of your policy’s cash value if you surrender it. You’ll still incur cancellation penalties or fees, but they will decrease with the number of years you’ve owned the policy. Of course, unlike death benefits, any cash you receive from this surrender is taxable under United States law. For solid tax advice, it’s a good idea to talk to your tax expert about any tax implications before surrendering your policy.

You have other options

Most of these considerations are compelling reasons to reconsider cancelling your life insurance policy. Even so, your underlying motivation for surrendering your life policy may still exist. Perhaps you have added new policies through employer-provided group life insurance and you feel confident that you have more than enough coverage. Or maybe your original purpose for your policy was to provide financial security for your family when you had young children, ensure college tuition was paid, or relieve the burden of a mortgage from your spouse in the event of your death. If these are no longer concerns — your children have grown, student loans are paid, and you’re debt-free — maybe cancelling your life insurance policy is still a good idea.

However, if you thought about cancelling your life insurance because the monthly premiums are breaking your bank account, you do have other options that can help to resolve your financial challenges.

Depending upon your life expectancy, the amount of your policy, and your comfort level with the question, you might consider asking your beneficiaries to help you pay — or completely take over paying — your monthly premiums. For example, you might be 20 years into a $750,000 30-year term life insurance policy, and health concerns present the possibility that you won’t be around to see the end of the term. Your beneficiaries may be in a financial position where a $750,000 payout will outweigh the amount they’d pay by assuming payment of your remaining premiums. This option isn’t for everyone, but for some situations, it may be the right choice.

Another potential solution is a life settlement. Basically, a life settlement is a transaction in which the owner of a life insurance policy sells it to a third-party for an amount that is less than the death benefit, but more than its cash value. In this situation, the policyholder receives a lump sum cash payment, but loses the coverage. The buyer becomes the new policy owner and continues to pay annual premiums on the policy until the insured passes away. When this occurs, the buyer receives the death benefit payout.

Life settlements are a great compromise between completely cancelling a life insurance company policy and struggling to make premium payments. The settlement you receive could serve your family’s immediate financial needs today rather than after you’re gone, or provide you the peace of mind that your financial obligations are resolved, at least for the foreseeable future.

If you’re interested in learning more about life settlements, discounts, or the fine print about cancellation in your particular life insurance policy, talk to your life insurance agent. You may find that you have more options than you originally thought.

Things You Should Know Before Canceling Your Life Insurance Policy

Life insurance can be a tricky thing. Most people — 84 percent, in fact — believe lifetime coverage is important, yet only 59 percent of Americans actually own a life insurance plan. The reasons for not having life insurance vary. First of all, it’s sometimes difficult for the average person to know the type of coverage or how much life insurance they need for their entire life, let alone how much coverage they should buy. For others, the whole life insurance process and obtaining life insurance quotes is just a hassle. But for the majority of non-policyholders, monthly insurance premiums just don’t seem to fit into their final expenses budget.

Interestingly, these are some of the same concerns that lead life insurance policyholders to cancel the policies they’ve already purchased. A lack of understanding about the type of life insurance they actually own and the financial burden of monthly premiums are two of the leading reasons for policy cancellations. For other policyholders, their motivation is that they believe they simply don’t need the policy anymore, perhaps due to changes in their family or financial circumstance since they first purchased it.

If you’ve thought about canceling your life insurance policy for whatever reason, there are several incredibly important facts you should know before you cash in or stop paying premiums to your life insurance company .

Consider the consequences

Before you start spending your monthly life insurance premium on something else, whether it’s past-due bills, estate taxes, credit card debt, or food delivery and other expenses, take a moment to consider the complete details of what will happen when you do indeed lose your life insurance coverage.

The first, most obvious result is the sale guarantees that your beneficiaries will no longer receive a death benefit when you pass away, regardless of the years of the policy that have been paid off. Your death benefit with a life insurance policy is its face value, or the payout your family members, loved ones, or other beneficiaries would receive in the event of your death. The payout amount could actually be higher with certain policies and in certain scenarios. For example, your policy may have an accident clause that doubles the death benefit if you die in an accident, though exclusions may apply. If you cancel your policy before you die, there will be no payout.

Some people purchase a lifetime of life insurance protection so the proceeds can be used to pay off any outstanding financial obligations, like a mortgage or credit card debt. Others have policies specifically designated to pay their funeral expenses or treatment expenses following certain medical conditions. Still, there are individuals who want their policy payout to go to their children as an inheritance, or to their spouse as a financial safety net. These are all very personal and practical motivations that should be considered before canceling a policy and forfeiting these benefits.

Another consequence of cancelling that some people don’t ever think about is future insurability. Perhaps you have reasons to cancel your policy now, but at a later date, you decide maybe that wasn’t the best idea, after all. If you need to purchase a new policy, the insurance company will probably consider your age and medical history before deciding on your premium amount, coverage amount, or even if they can insure you at all. You may even have to undergo a medical exam to obtain proof of insurability, or prove that you’re in good enough health for the insurance company to cover you. If you’re approved, you’re much more likely to pay significantly higher premiums. These are all possibilities that shouldn’t be overlooked when you’re weighing your life insurance options. .

The type of policy matters

Another consideration in deciding whether you should cancel your insurance policy or not is the type of life insurance policy you currently hold. There are typically two basic categories: Permanent life insurance and term life policy .

Permanent life insurance is often referred to as “whole life” insurance, although a whole life policy is just one of several kinds of permanent policies, including universal life insurance. Permanent life insurance policies have no definite time period of coverage or certain number of premium payments to be made. They are designed to be paid until the insured’s death, and premium amounts never increase. Additionally, a certain type of permanent life insurance comes with a savings component. Savings gain tax-deferred cash value throughout the life of the policy. These gains will be paid along with the death benefit. Some permanent coverage even offers dividends.

Term life insurance is issued for a specific period of time — usually 10, 20, or 30 years. Term policies are fairly straightforward; if the insured dies at any time during the life of the policy (and premiums have been paid as expected), the beneficiaries receive the entire face value, or death benefit. Because the policy doesn’t include cash value like a permanent policy, term life insurance premiums are more affordable. At the end of the designated term, all coverage ends. Of course, most policies have the option for renewal for a new term.

Ways to cancel a policy

In addition to providing varying benefits while in force, the differences in permanent insurance and term life will also come into play if you decide to cancel.

Term life, again, is straightforward. If you want to cancel your policy, simply stop paying your premiums. Your policy will lapse, you will forfeit the premium payments you’ve already made. There will be no coverage for the insured or death benefit for the beneficiaries. Another option for canceling a term insurance policy is to write a simple letter to the insurance company notifying them that your wish to cancel.

The actual process of cancelling permanent insurance isn’t necessarily more complicated than canceling term life; you just have to decide from more options — and that can be overwhelming. Each insurance policy will differ slightly in the details, but your insurance agent will be able to explain exactly which options are available for your particular policy.

The period of time you’ve paid on your policy is one of the most important factors affecting your cancellation. The first few years of a policy are a “surrender period” during which you can cancel the policy, receive little to none of the cash value your policy may have accrued, and incur penalties or fees.

If you’d paid on your permanent policy for a while, you should be entitled to receive some or all of your policy’s cash value if you surrender it. You’ll still incur cancellation penalties or fees, but they will decrease with the number of years you’ve owned the policy. Of course, unlike death benefits, any cash you receive from this surrender is taxable under United States law. For solid tax advice, it’s a good idea to talk to your tax expert about any tax implications before surrendering your policy.

You have other options

Most of these considerations are compelling reasons to reconsider cancelling your life insurance policy. Even so, your underlying motivation for surrendering your life policy may still exist. Perhaps you have added new policies through employer-provided group life insurance and you feel confident that you have more than enough coverage. Or maybe your original purpose for your policy was to provide financial security for your family when you had young children, ensure college tuition was paid, or relieve the burden of a mortgage from your spouse in the event of your death. If these are no longer concerns — your children have grown, student loans are paid, and you’re debt-free — maybe cancelling your life insurance policy is still a good idea.

However, if you thought about cancelling your life insurance because the monthly premiums are breaking your bank account, you do have other options that can help to resolve your financial challenges.

Depending upon your life expectancy, the amount of your policy, and your comfort level with the question, you might consider asking your beneficiaries to help you pay — or completely take over paying — your monthly premiums. For example, you might be 20 years into a $750,000 30-year term life insurance policy, and health concerns present the possibility that you won’t be around to see the end of the term. Your beneficiaries may be in a financial position where a $750,000 payout will outweigh the amount they’d pay by assuming payment of your remaining premiums. This option isn’t for everyone, but for some situations, it may be the right choice.

Another potential solution is a life settlement. Basically, a life settlement is a transaction in which the owner of a life insurance policy sells it to a third-party for an amount that is less than the death benefit, but more than its cash value. In this situation, the policyholder receives a lump sum cash payment, but loses the coverage. The buyer becomes the new policy owner and continues to pay annual premiums on the policy until the insured passes away. When this occurs, the buyer receives the death benefit payout.

Life settlements are a great compromise between completely cancelling a life insurance company policy and struggling to make premium payments. The settlement you receive could serve your family’s immediate financial needs today rather than after you’re gone, or provide you the peace of mind that your financial obligations are resolved, at least for the foreseeable future.

If you’re interested in learning more about life settlements, discounts, or the fine print about cancellation in your particular life insurance policy, talk to your life insurance agent. You may find that you have more options than you originally thought.

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