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Can I Cancel My Life Insurance Policy?
Are you considering cancelling your life insurance policy? Perhaps you’ve found a better policy, have a different financial situation, or no longer feel the need for coverage. Whatever the reason, cancelling a life insurance policy is a significant decision that needs careful consideration.
Quick article guide:
● What Is Life Insurance And How Does It Work?
● Why Do People Cancel Their Life Insurance?
● What Happens When You Cancel Your Life Insurance Policy?
● Alternatives To Cancellation.
● How To Cancel Your Life Insurance Policy.
This article walks you through the benefits of life insurance, the alternatives to cancellation, and unpacks the repercussions of cancelling your life insurance. We also provide a step-by-step guide on how to cancel your life insurance if you know this is the right decision for your financial future.
How Does Life Insurance Work?
You may already be well aware of life insurance and why people take out life insurance policies. However, as a refresher, the following section unpacks how life insurance works and describes its main features.
Life insurance is a contract between an individual and an insurance company, where either the insured individual or someone else pays regular premiums to insure someone’s life. If the insured individual dies, the insurance company pays out a sum of money to the beneficiaries.
Beneficiaries may be close family, a business partner, or a spouse. Regardless of the beneficiaries, life insurance prevents beneficiaries from undue financial hardship if the insured individual passes away unexpectedly.
There are several types of life insurance, including term life insurance and whole life insurance. These are defined below.
● Term life insurance: Term life insurance covers a specified term, such as 10, 20, or 30 years, and pays out a death benefit if the insured passes away during that term.
● Whole life insurance: Whole life insurance covers the insured’s entire life and includes an investment component, known as cash value, which can grow over time.
Reasons For Cancelling a Life Insurance Policy
There are several reasons why someone may consider cancelling their life insurance policy. These include:
● Changing financial circumstances: If times are tough and it’s hard to keep up with life insurance premiums, cancelling your policy may seem like the only option.
● Changing to a different insurance policy: If someone finds a policy with better terms, they may choose to switch over to ensure their policies stay up to date and continue to meet changing needs.
● Changing personal circumstances: If the insured individual no longer feels like their life insurance payout will be needed after their death, or if an important beneficiary is no longer in their life, they may consider cancelling their policy. An example of such a change is when adult children become financially independent.
● Debts have been paid off: In some cases, life insurance is taken out to ensure outstanding debts are paid off and don’t burden the family after the insured individual’s death. If these are paid off, there may no longer be a need for a life insurance policy.
Regardless of the reasons, cancelling a life insurance policy has a few noteworthy financial implications beyond the lack of insurance payout following a death. These are discussed below.
What Happens When You Cancel a Life Insurance Policy?
● Loss of financial protection: The obvious and immediate consequence of cancelling your life insurance policy is the loss of death benefits that would be paid out to beneficiaries upon your passing. This loss of financial protection can leave your loved ones vulnerable in the event of your untimely death.
● Forfeiting cash value: If you’ve taken out a whole life insurance premium, you forfeit any cash value that may have accumulated over the years. Since you can borrow or draw on your policy’s cash value for investments in certain circumstances, this may be a potential loss of funds.
● Higher premiums later: If you cancel your policy now and decide to purchase a new policy or reinstate your policy, your premiums may be higher or more difficult to obtain altogether. Since insurance companies set rates according to calculated risk, your cancellation may stand out as a risk and drive up future premiums.
Of course, there is always the potential upside of freeing up more monthly funds to invest in something else of value, such as better health insurance or perhaps a new house or car. Before committing to the idea of cancelling your life insurance, however, remember to keep the following in mind:● Consider your beneficiary’s circumstances. Will they have enough resources to meet their financial needs without the death benefits provided by life insurance if you pass away unexpectedly?
● Health and insurability. Life insurance rates may go up if your health is deteriorating. If you cancel your policy now but later decide to reinstate or purchase a new policy, you may face higher premiums or even difficulty obtaining coverage due to changes in your health.
If you’re still unsure, consider consulting a financial advisor or insurance professional to help you evaluate your current circumstances and determine if cancelling your life insurance is the best option for you.
The Alternatives to Cancelling a Life Insurance Policy
If you don’t like the idea of cancelling your life insurance policy but don’t have the financial wiggle room to keep paying the monthly premiums, you still have options:
● Review your insurance policy. In most circumstances, you can review your current policy with your insurance agent and see if you can adjust the premium or term.
● Life insurance policy loan. You can borrow against the cash value of your whole life insurance policy, which can provide the necessary funds to meet your immediate needs while still keeping your policy intact.
If you want to take out a loan against your life insurance policy, ensure you understand the repayment terms and rates before choosing this option.
How To Cancel a Life Insurance Policy
Cancelling a life insurance policy is not as simple as calling your insurance company and asking to terminate the coverage. There are specific steps you need to take to ensure a smooth cancellation process:
1. Review your policy documents: Look for information regarding cancellation procedures and requirements. There may be associated fees with cancellation, so ensure you’re well-informed on your policy.
2. Contact your insurance company: Email or call your insurance and inform the customer service department that you want to cancel your policy.
3. Follow-up: Customer service may need you to sign off or pay a cancellation fee. Ensure you follow up on these responsibilities to complete the cancellation process.
4. Keep a record: Just in case of disputes, make sure you have a record of the cancellation procedures. Records include written cancellation confirmation from your insurance company.
It’s important to keep in mind that the cancellation process may vary depending on the insurance company and the type of policy you have.
Final Thoughts
You might consider cancelling your life insurance policy because of changing personal or financial circumstances. Regardless of your reasons, cancelling your life insurance has potentially harmful implications for your beneficiaries and depending on the type of insurance, your access to funds. Before deciding to cancel your life insurance, ensure you do your research, consider alternatives, and seek advice.
Ultimately, life insurance provides a financial safety net for your loved ones in the event of your passing, so consider the long-term implications of this decision.
