Canceling your life insurance policy

You can cancel your coverage at any time — but you probably won’t get your money back.

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If you no longer want or need coverage, you can cancel your life insurance policy. But here’s the bad news: You most likely won’t see any of the money you paid in premiums.

Can I cancel my life insurance policy?

You can typically cancel your life insurance policy at any time — either by letting your insurer know or no longer paying premiums. But if you let your policy lapse by stopping to pay premiums, you’ll lose your policy’s cash value and it may be more difficult to get life insurance again if you decide to reapply.

Canceling a term life policy is pretty straightforward. But since permanent policies are life insurance and investment products rolled into one, the process can be complex and time-consuming.

I still want coverage. Can I convert my term life insurance policy instead?

If your term life policy has a conversion feature, you can convert to a permanent policy before the deadline. Depending on your insurer, this may be before the term policy ends, or before your 60th, 65th or 70th birthday.

If the deadline has passed, you won’t be able to convert your coverage.

Basics of life insurance: How does it work?

Will I get my money back if I cancel my life insurance policy?

In most cases, you won’t receive a refund on the premiums you paid. There are two exceptions:

  • You canceled during the “free look period.” You do have the right to cancel your policy and receive a full refund of the premiums payed until a specified amount of time has passed – usually within 10 days. This period is called the “free-look” or “cooling-off” period. Check with the insurer and review your policy to see how long your free look period is.
  • You have a return of premium policy or rider. Some insurers offer return of premium (ROP) riders or standalone policies. If you decide to cancel your coverage, you’ll receive 100% of the premiums you paid — and possibly the fee you paid to add the rider to your policy (if applicable). The refund might not include the cost of any administrative fees or additional riders. However, keep in mind you may not be able to add this rider after signing up for your policy, so make sure it’s included if you think you’ll need to cancel your policy early.

How do I cancel my life insurance policy?

The process varies between policies, but these are the general guidelines.

Canceling term life insurance

To cancel your term life coverage, you can call your insurer, write a letter or fill out a cancellation form. Include your full name, contact details, policy number and the date you’d like to cancel your coverage.

While you’re at it, cancel any automatic payments you may have set up with your bank or insurer.

If you don’t receive a confirmation from your insurer within a few business days, follow up to make sure the policy has been canceled.

Canceling permanent life insurance

Since permanent policies have an investment component, canceling is a little more complicated. You’ll need to contact your insurer.

Depending on your insurer’s guidelines and how long you’ve owned the policy, they may give you these options:

  • Surrender the policy. You might be able to surrender your policy and collect any cash value you’ve accumulated. However, you’ll probably have to pay fees — especially if you cancel early on in your policy.Typically, the surrender fees in the first 2 to 3 years are steep, so the insurer can recoup their costs of selling and setting up the policy. After that, the fees are usually reduced. For example, if your surrender penalty was 50% in the second year of owning your policy, it might be 0% in the third year. All of these fees will be detailed in your policy documents. When you cancel your policy this way, you’ll walk away with the “cash surrender value” — and the longer you owned your policy, the more money you’ll get.
  • Reduced paid-up option. Your insurer may offer this option, which allows you to stop paying premiums but maintain a reduced death benefit on your policy worth the amount of your cash value. If you die, your beneficiaries will receive a lump sum death benefit.
  • Extended term insurance. Some companies may give you the option to use your cash value to purchase a term life insurance policy that would be in effect for as long as the cash value allows.
  • Sell your policy. You may be able to sell your policy to a third-party for a one-time upfront payment. The payment to you is usually less than the death benefit but greater than the cash value. Keep in mind that most provinces in Canada don’t currently allow life insurance policies to be sold – with the exception of Quebec, New Brunswick, Nova Scotia, and Saskatchewan. Some companies may also not allow their policies to be sold even if it is permitted by the province, so check with your insurance company first to learn its stance on selling life policies.

What is the cash surrender value?

Permanent policies contain an invested cash value component that grows over time. If you surrender your permanent policy, you might be able to collect some of the cash value — known as the “cash surrender value” or CSV.

The dollar figure you’ll get depends on how long you owned the policy. For example, if you cancel during the first few years of taking out a policy, you may not have built up enough cash value to collect. And if you cancel at a later stage, you’ll receive the cash value minus any fees, charges and loans.

Watch out for taxes!

The cash value grows on a tax deferred basis. Meaning that when you surrender your cash value, you’ll be responsible to pay taxes on the amount of interest you’ve earned. If you do decide to surrender your cash value, it would be best to discuss your situation with a tax advisor to ensure you fulfill all of your tax obligations.

What happens if I stop paying premiums?

If you stop paying premiums by the end of the grace period your insurer will cancel your coverage. But if you have a permanent policy with accumulated cash value, you’ll lose it — so only go down this route if you’re comfortable with that. And it may affect your ability to get coverage later on, especially if you want to apply with the same insurer.

Reasons to cancel your life insurance policy

If these situations apply to you, it might make sense to cancel your life insurance:

  • You no longer have financial dependents.
  • You’ve paid off all of your debt.
  • You can’t afford the premiums.
  • You want to invest your money in an account or portfolio with higher returns.
  • You want to take a more aggressive approach to investing.
  • You want to collect the cash value portion of your policy.
  • You’ve stopped smoking or your health has improved, and you’ve been offered a better rate on a new life insurance policy.

What if I change my mind about canceling my policy?

You’ll need to apply for a new policy, and potentially go through the underwriting process again. Your insurer will likely charge you a higher rate, too. This is because life insurance premiums are based on factors like your age and health, so the longer you wait, the more you’ll pay for coverage.

If you miss a payment, your coverage may lapse if you don’t make up the missed payment within the grace period. If you decide you want to reinstate your coverage after the grace period, talk to your insurance company to see if you can accelerate the application process. Although, keep in mind you may face higher premiums simply because you have a lapsed policy on your record.

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Can my life insurance company cancel my policy?

Your insurer can cancel your policy in two circumstances:

  • You stop paying your premiums.You’re typically extended a grace period that keeps your benefits active even if you’ve occasionally paid a premium late. After the grace period, your insurer reserves the right to cancel your policy.
  • Your application is found to be fraudulent.If your insurer finds that you purposefully lied on your application or provided fraudulent supporting documents, your insurer has just cause to cancel your policy. If the fraud isn’t caught until after your death, your insurer can cancel any claim due to your beneficiaries.

Your insurance company can’t cancel your coverage if you start smoking, take up a dangerous job, gain weight, or are diagnosed with a health condition. But keep in mind, your policy might have coverage restrictions depending on the cause of death.

When can my group life insurance be canceled?

If your employer decides to stop offering life insurance as part of its employee benefits, it can cancel your policy. Otherwise, your coverage will automatically be canceled when you leave that job — unless there’s an option to convert to an individual policy.

What if I can’t afford my premiums or need to access my cash value?

If you want to keep your coverage but can’t afford to pay your premiums, you might be able to:

  • Reduce your coverage. Most insurers will allow you to decrease the face value of your policy — and in turn, lower your premiums.
  • Take a new medical exam. If you’ve had your policy for at least a year and your health has significantly improved, your insurer may let you take another medical exam. If the results are good, your insurer might lower your rate.
  • Borrow against your policy. Once you’ve built up enough cash value, you can take out loans against your permanent policy — but if you don’t pay it back, this may reduce the death benefit your beneficiaries receive when you die. You may have to pay taxes on the loan too.
  • Sell your policy as a life settlement. If you’re an older policyholder who’s expected to live for another five to ten years, you might be able to sell your life insurance policy to recover at least the amount of the cash value of your policy. However, be aware of any provincial or company sale restrictions, broker fees and tax implications.

    Bottom line

    Canceling a life insurance policy is a fairly straightforward process, and can be as easy as stopping your payments. But unless you have a return of premium policy or cancel during the free look period, you won’t get all of your money back.

    To find a policy that suits your specific needs and budget, compare life insurance companies.

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