How to Cancel Life Insurance

Thinking of cancelling your life insurance policy? If so, you have a few different options to choose from to terminate your policy.

Caitlin Wood
Updated November 27, 2020

Life insurance is a great way to ensure your loved ones are financially cared for in the event that you pass away and leave behind a mortgage and many other bills to pay. But there may be times when you may want to cancel your policy.

Perhaps your children are adults now and are out of school and no longer need your financial assistance. Or maybe you can’t afford the premiums you’re currently paying, or you’ve decided to separate your life insurance from your retirement investments.

Whatever the case may be, you can cancel your life insurance policy. In this article, we’ll explain how, as well as what to expect when you cancel.

Can You Cancel Your Life Insurance? 

Yes, you’re allowed to cancel your life insurance policy if you decide you no longer want or need it. You can do this at any point throughout your policy. All you need to do is inform your insurance provider. 

Technically, you could simply stop paying your premiums, at which point you will no longer be covered. But it’s best to formally notify your insurance company, especially if you are looking to retain your policy’s cash value. Also, you may have a tough time reapplying for insurance in the future if you choose to take out another policy for whatever reason. 

Process of Cancelling Term Vs. Permanent Life Insurance

The process of cancelling life insurance depends on whether you are cancelling a term or permanent policy.

Cancelling term life insurance. A term life insurance policy is relatively easy to cancel. Simply call your insurer and inform them that you would like to terminate your policy. You may also want to provide written notification of your intentions to have on record. 

Your insurance provider should provide you with a confirmation that your policy has been cancelled within a few days. Be sure to cancel any automatic payments with your insurance provider or bank. 

Cancelling permanent life insurance. The process of terminating a permanent life insurance policy is a bit more complicated. That’s because these types of policies also involve an investment component. Your options for cancelling include the following:

Surrender your policy. You may be able to surrender the policy and cash in on its current value. In this way, you will take home the policy’s “cash surrender value.” The longer you’ve held the policy, the more money you will receive. 

Just keep in mind that there will likely be fees involved if you terminate the policy early on, especially within the first couple of years. The further along in the policy you are, the lower the fees will be. 

Sell the policy. You can choose to sell your policy if you can find an interested third party. By taking this route, you should be able to recoup more than the policy’s cash value, but less than the death benefit amount. 

However, certain provinces may not permit the sale of your permanent life insurance policy, except for Saskatchewan, Quebec, New Brunswick, and Nova Scotia. Further, some insurance providers may not allow policies to be sold, regardless of what province you reside in. 

As such, you’ll want to verify whether or not the sale of a policy is permitted with your insurance company before you decide to sell. 

Reduced benefit option. Your insurance may allow you to stop paying your premiums in exchange for a reduced death benefit worth the amount of the policy’s cash value. When you pass away, your beneficiaries will still receive the lump-sum death benefit, though at a reduced amount.

Extended-term insurance. Some insurance providers may allow you to use the cash value of your policy to buy term life insurance. The length of time that the policy would be in effect would depend on the cash value. 

Cash Surrender Value and Permanent/Whole Life Insurance

With a permanent life insurance policy, there is a “cash value” component that grows throughout the duration of the policy. The longer you hold your policy, the larger the cash value component grows, as noted above. You may be able to collect on this cash value if you ever surrender your policy at some point in the future. 

The amount you can collect will depend on how long you’ve owned the policy. The longer you keep it, the more you’ll accumulate. However, it should be noted that the cash value increases on a tax-deferred basis, which means you may not have to pay taxes as the money grows, but you will eventually have to pay up if you surrender your cash value.  

If I Cancel My Life Insurance, Will I Get a Refund on My Premiums?

When you cancel your life insurance policy, the premiums you’ve paid thus far will not be refunded, but there are certain exceptions:

Return of premium (ROP). If your insurance provider offers a “return of premium (ROP)” rider or policy, you will be able to get all of the money you paid in premiums if you ever cancel your policy. This type of rider will need to have been purchased when you initially bought your policy, as you likely won’t be allowed to add it after you first sign up. 

Freelook period. Insurers usually give policyholders a grace period during which you may be able to cancel your policy and get a refund on all the premiums you’ve paid. This is known as a “free look period” and is usually no more than a week or two.

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Is it Possible to Convert My Term Life Insurance to a Permanent One?

Yes, you may convert your term life insurance to a permanent policy if your current policy has a conversion feature. In this case, you can change your coverage into a permanent policy prior to the deadline, which can be before the term policy ends, or before your 65th birthday, for example. 

The exact deadline will depend on your insurance provider. Once that deadline passes, you will no longer be able to convert your insurance plan. 

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Why Did My Life Insurance Provider Cancel My Policy? 

There are a few reasons why insurance companies cancel policies:

You stopped paying your premiums. If you stop making payments, your policy will be deemed terminated. However, your insurer will likely keep your policy active for a certain amount of time after a late payment. But after that, your insurance provider will have the right to terminate your policy if all premiums cease to be paid. 

You lied on your application. If you provided false information or omitted important information when you first took out your life insurance policy, your insurance provider has the right to cancel your coverage. 

Your employer stops offering life insurance. If you are a member of a group life insurance plan with your employer, but the company decides to stop offering this policy, then your policy can be cancelled. This can also happen if you quit your job, in which case the group policy would no longer apply to you. 

What Will Happen if I Don’t Pay My Premiums?

As mentioned above, your insurance provider has the right to cancel your policy if you don’t pay your premiums. You will have a grace period to catch up on your late payments, but following that period, your policy will be cancelled. 

If you’re unable to afford your premiums but still want to retain a life insurance policy, you have some options:

Lower your coverage. More comprehensive coverage is usually more expensive. But you can reduce your premiums by reducing your overall coverage. 

Retake your medical exam. If you believe that your health has improved a great deal since you initially took out your policy, you may request to have another medical exam conducted. If the results are vastly better than when was originally recorded, your insurance company may agree to charge lower premiums without affecting your coverage. 

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Borrow against the policy. When you’ve accumulated a sizable cash value, you can use that component of your policy as somewhat of a loan to borrow against. However, your death benefit will be reduced if you do not pay it back. Plus, you may have to pay taxes on the borrowed funds. 

Final Thoughts

While a life insurance policy can help provide your family with a financial cushion to fall back on in the event that you pass away, you may have reasons to cancel your policy. If so, you have a few different options to choose from to terminate your policy, some of which may even leave you with extra cash in your pocket.