How to Cancel Your Life Insurance Policy

Reasons People Cancel Life Insurance Policies

 While you had a good reason for buying your policy years ago, situations change. Perhaps you’ve paid off your mortgage and your children are out of college and living independently. Or perhaps you bought the policy for estate planning purposes, but due to changes in the law, it no longer serves its intended purpose.

You may also be retired and living on a reduced income, so lowering expenses may be necessary. Eliminating a life policy premium may be necessary so that you can meet all your other expenses.

Inflation may also be a factor in wanting to reduce your expenses. Many people are faced with deciding whether to put gas in their car to get to work, cover basic household expenses, or pay life insurance premiums.

Whatever the reason, you have every right to cancel your life insurance policy whenever you’d like.

Canceling a term life insurance policy.

Canceling a term life insurance policy is not complicated. You can simply do one of the following:

• Stop paying your premiums and let the policy lapse
• Call your insurer or write them a letter telling them you’d like to cancel your policy
• Go to your insurer’s website and complete an online cancellation form (if they have that option) 

Canceling a whole life or universal life insurance policy.

If you have a whole life or universal life insurance policy, you can also cancel the policy at any time. You won’t get back any premiums you paid for the policy, but you may receive a payout from the cash value, if one has accrued. However, bear in mind that there may be surrender fees taken from your cash value. The surrender fees are specified in your policy.

The process of canceling a whole life or universal life insurance policy is very similar to canceling a term life policy – stop paying premiums or notify the carrier. However, when canceling these types of policies, your insurer may offer you several nonforfeiture options.

1. Cancel the policy and cash out.With this option, you take the policy’s surrender value and forfeit future life insurance coverage. This is often the default option if you don’t notify the insurance company and let your policy lapse.
2. Convert the policy to an extended term life insurance policy.In this case, your cash value is used to buy a term policy with the same death benefit your whole life insurance had. You will lose your coverage when the policy’s term ends.
3. Take a reduced paid-up option.This option lets you select a lower policy death benefit and make a one-time premium payment equal to your cash value. Since you’ll still have a permanent policy (as opposed to a term policy), your coverage will stay in force the rest of your life and is guaranteed to pay your beneficiaries a death benefit.

Understanding Policy Lapse and Its Long-Term Consequences

Letting your policy simply lapse is not the best option and can have long-term consequences. The most obvious consequence is that your beneficiaries will not receive the death benefit and may suffer financial hardship when it comes to paying your final expenses.

Other consequences include:

• Difficulty reinstating the policy: The insurance company may have reinstatement conditions including requiring new evidence of insurability and payment of missed premiums during the lapse.
• Higher premiums: If you reinstate the policy or get a new policy, your premiums will likely be higher due to your increased age or new health issues.
• Surrender fees: If your policy has a cash value, the insurer may charge surrender fees which will reduce the amount of cash that you can collect.
• Tax consequences: if you have taken loans or withdrawals from a cash value policy, when it lapses you may have tax consequences.
• Credit: If you let your policy lapse, the life insurance company may report missed payments to the credit bureaus.

Selling your whole or universal life insurance policy.

You may have another option instead of letting your whole life policy lapse or selecting a nonforfeiture option – selling your policy and receiving a lump sum payment. This option is called a life settlement.

With a life settlement, a third party will pay you cash for your policy. Most payouts are greater than the cash value of the policy and less than the policy’s death benefit.

The settlement amount you’ll receive depends on several variables, including your age, health condition, and the policy’s face amount. In the past, only people with poor health could qualify for a life settlement, but because of innovation in the industry, today even healthy people may be eligible, depending on several additional factors.

Eligibility requirements and factors that impact the settlement amount generally include:

• Age: Most of the time you must be age sixty or older.
• Policy type: Investors are generally most interested in whole or universal life policies, but some term policies may also be eligible.
• Death benefit: The death benefit usually must be $100,000 or more.
• Your health: Although it seems a bit morbid, if you’re in poor health, the settlement will likely be higher.
• Policy premiums: Your premiums generally need to be less than 5% of the death benefit.
• Policy issuance date: The policy must have been in effect for a certain period of time depending on your state’s rules. This time period is often 25 months.

Tax Implications of Surrendering or Selling a Life Insurance Policy

If you surrender your life policy for its cash value, the amount you receive less the amount you’ve paid in premiums (which is your cost basis) may be taxable as income. You may also have tax consequences if you have outstanding loans on the policy that exceed the amount you paid in premiums.

If you sell your life policy with a life settlement, the amount you receive less your cost basis may be taxable as income or as a capital gain. However, some situations may make the transaction tax-exempt. For example, if you have a terminal or chronic illness, you may qualify for a tax-exemption on the gain.

The type of life insurance policy can also influence the tax implications. For example, selling a term life insurance policy usually results in minimal tax consequences since it has no cash value.

Comparing Policy Cancellation, Surrender, and Life Settlement

Let’s compare your options.

Policy Cancellation

Pros:

• Eliminates policy premiums
• Access to cash value, if applicable

Cons:

• No death benefit for beneficiaries
• Potential surrender charges
• Potential tax implications
• Hard to reinstate
• Higher premiums if reinstated

Policy Surrender

Pros:

• Eliminates policy premiums
• Receive the cash value

Cons:

• Surrender fees
• No death benefit for beneficiaries
• Potential tax implications

Life Settlement

Pros:

• Receive a payout higher than the cash value
• Eliminates policy premiums
• No surrender fees
• Potential for tax-exemptions

Cons:

• You may not be able to get more life insurance because the policy will still be in place
• Potential capital gains tax
• Your beneficiaries will not receive a death benefit unless you only sell part of your policy

In Closing

If you would like to learn more about selling your universal or whole life insurance policy and receiving a life settlement payout, simply complete a short online form to see if you may be eligible, then speak with one of our life settlement experts to begin the information gathering process. Soon after that, we’ll let you know if we’re able to make an offer to purchase the policy.

And remember – if you qualify for a life settlement, it will ALWAYS pay you more than canceling or surrendering your policy.