Thinking of canceling your life insurance policy? Not sure what happens next? Keep reading as we explain the in’s and out’s of these and also discuss the question of whether or not you can get any of your money back when you cancel a life insurance policy. Please remember that no online resource can replace real-life individual advice, so when in doubt talk to your insurance agent – even an online one – to find out the exact implications of canceling your specific life insurance policy.
Of the 57% of Americans that have life insurance coverage, 44% take out the policy as income replacement for their families should anything happen to them. However, with more Americans turning to “last resort” assets like retirement accounts and whole life insurance to pay for medical bills, business start-up funds, a down payment on a home, or other major life events, it’s important to understand the risks and consequences that come with the cancellation of life insurance policies.
So, what will happen if you cancel your life insurance policy? Ultimately, the answer to this depends on whether you have term life insurance, or a whole life or universal life insurance policy. When you voluntarily cancel your life insurance, canceling a term policy simply stops your coverage. Canceling a whole life or universal policy can have more complications with respect to taxes and insurance laws, as well as the specifics of your policy and timing of the cancellation.
Do You Get Money Back When You Cancel a Life Insurance Policy?
If you had a whole life insurance policy, you will get money back if you’ve been paying premiums past the surrender period. If you had a term policy, you do not get the cash back under any circumstances, your premiums are completely forfeit.
Think of term life insurance like renting an apartment, while whole life insurance is like buying a house: if you curtail term coverage, you just stop making payments and you no longer get coverage. If you cancel a whole life policy, it has a cash surrender value that increases with time and premiums paid. Unlike home equity, however, which is entirely contingent on market values, there is a surrender period that must be waited out until you can get any cash.
Can You Cancel Life Insurance at Any Time?
Like with the housing analogy, canceling term life insurance is easier than canceling whole life insurance. You can cancel a term policy any time by notifying the insurer or simply stopping payments. If you want to cancel a whole or universal life insurance policy, you will have to notify the insurer and find out the rules involved in forfeiting your coverage. Depending on state laws, how long you’ve had the policy, and specific terms in your policy, there may be conditions you must meet before you are able to cancel it (such as meeting the minimum surrender period).
Every insurer has different forfeiture rules so while you’re still considering if you should cash out your life insurance or not, contact them before doing so to find out what rules must be satisfied first.
Regardless of which type of life insurance that you get, there may be a “free look period” that is mandated by insurance laws in your state which is usually between 10-30 days. If you decide right after starting a life insurance policy that it doesn’t suit your needs, you should find out from your insurer if you’re covered under this free look period where you can get your premiums fully refunded if you’re still within this period.
Can You Get Money Back From a Life Insurance Policy?
You don’t get money back if you cancel a term life insurance policy. However, if you build up a cash surrender value with whole or universal life insurance, you can get money back from your policy upon cancellation providing that you meet all of the insurer’s conditions for forfeitures in adherence to state insurance laws where you live.
While this term varies by insurer and state laws, a range of 10-20 years is the typical holding period where you no longer have to pay steep surrender charges upon canceling a life insurance policy. Surrender charges will be very high during this period and are meant to discourage policyholders from cashing out too early.
What Happens to Life Insurance if You Don’t Die During the Term?
With a term life insurance policy, you simply maintain your coverage provided that payments are still being made while you are alive. Upon your death, death benefits are paid to your beneficiary and the policy is terminated.
With a whole or universal life insurance policy, a cash value starts to accumulate similarly to an investment or retirement account. The cash surrender value is based on financial market performance and how much you have paid in premiums over time. Provided that you don’t die during this term and your premiums are being paid, the cash surrender value will keep increasing in accordance with the markets.
Does Life Insurance Always Pay Out?
Under insurance laws, insurance policies are obligated to pay out upon the policyholder’s death. Your beneficiaries may face delays depending on how quickly they file the claim, if there are probate issues, and additional 6-12 month delays if you died within the first two years of beginning your life insurance policy. However, payouts must be guaranteed according to the law even if the insurer needs time to review the claim.
As for payouts from your insurance company while you are still alive, you are not necessarily guaranteed a payout depending on the insurer’s forfeiture rules, state laws, and the reason for canceling your policy.
In the event that you can’t get a full cash payout by canceling your whole or universal life insurance, or it doesn’t completely suit your needs since affordability is your concern rather than needing a large amount of cash, you may have other options upon cancellation.
Some insurers offer a reduced paid-up option where you can halt your payments in exchange for a smaller death benefit. Depending on the terms of your policy and state laws, just stopping your payments without notifying the insurer in advance that you’d like to cancel can produce different results. Some of them will automatically cash out your entire policy. Others will let the policy lapse and then you let you reinstate it within a set period, and this option is often more economical than buying a new policy.
Canceling your whole or universal life insurance to cover an emergency or major expense can leave your family in the lurch once the coverage ends. If you need a large sum of money and are considering tapping into your life insurance policy, you should explore alternatives such as taking out a loan against the policy. This is because there are tax consequences for the portion of the payout that exceeds the premiums you paid, unless you are chronically or terminally ill and qualify for accelerated death benefits. Additionally, if you decide to reapply for life insurance once the situation improves, you are forfeiting the premium rate you currently pay. Having to go for another medical exam and the underwriting process all over again while you’re older will inevitably cost you more, especially if you’ve developed any health issues in the time between terminating your old coverage and starting a new policy. You won’t be able to get the same favorable rates you could lock in when you were younger.