If I cancel a life insurance policy am I entitled to a refund?
A refund will depend on whether or not you’ve passed an insurers free look period. The free look period lets you review your life insurance policy for a minimum of 10 days — some states allow longer — and request a full refund if you’re unsatisfied with the policy.
If you’re planning on switching to a different company, make sure both insurers allow for policy transfers.
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Five things to consider when cancelling a life insurance policy
Some reasons why people cancel their life insurance policy can be that the premiums are too high, a better rate is available with a different company or the insurance company has dropped the coverage due to missed payments.
Whatever the reason, here’s some information to know when thinking about canceling a life insurance policy:
- Refunds within the free look period. You can cancel your policy within the specified free look period and the premiums you’ve paid will be fully refundable (provided that you’ve made no claims).
- Refunds after the free look period. Premiums will not be refunded and you may incur cancellation fees.
- Cancelling at anytime. Whether it’s a month or 11 months into the policy, the premiums paid to date will not be refundable.
- Taxes. Whole and universal life accrue cash value over time and can be subject to tax if you walk away from a policy.
- Request in writing. You’ll likely have to request the cancellation of your policy in writing.
Should I cancel my life insurance policy?
No one should ever feel like they are being burdened by premium payments for insurance they don’t need. However, consider the following before cancelling:
- You may need life insurance in the future. Your needs and circumstances will likely change over time and it may be difficult to get a new life insurance policy when you’re older. Two important factors that determine the premium you pay are your age and current health condition — the older you are the higher your premiums will be.
- How much have you paid premiums already? Cancelling life insurance won’t result in a premium refund. This could mean losing thousands of dollars you have already invested in a policy.
- Would your dependents be financially secure without you? Consider how your family would support themselves if you were to suddenly pass away. Are your savings enough to cover mortgage repayments, daily living costs, education, health insurance, funeral costs and everything else?
How to cancel your life insurance
Still think that canceling your life insurance policy is the right move? Here are the steps to do so:
- Decide if you want to switch to a new policy or cancel outright.
- Contact and inform your insurance company that you wish to cancel and fill out any documents necessary to end coverage.
- Let your life insurer know in writing so you have documentation to recall — get confirmation and make copies.
- Cancel any automatic payments you may have set up with your bank and the insurer.
- Follow up with your insurer to make sure your policy has effectively been cancelled.
What can I do instead of cancelling?
- Look at restructuring or switching your policy. This can give you a more affordable policy without surrendering all coverage and any benefits or discounts you’ve accrued.
How to pay less by restructuring your life insurance policy
You can reduce or restructure your life insurance policy if it no longer meets your needs. This method allows you to lower the premium rates you pay instead of canceling your life insurance policy outright and leaving yourself unprotected.
Focus on the following factors when reviewing your policy:
- Amount insured. Reducing the amount of coverage can help you save big, but before doing so consider having a full medical examination. If something potentially serious comes up then reducing the amount insured might be risky.
- A policy with critical illness or disability. If your existing life insurance plan has either of these features, you can look into dropping one or both to reduce costs.
- Additional features and benefits. Do the features and benefits on your current policy really match your needs? Consider keeping the additional features that are most beneficial and cut the rest to save money.
- Benefit period. Decreasing your maximum benefit period can also lower premiums significantly. This is the maximum amount of time a policy will pay out in the event of disability.