While you may have the perfect life insurance policy for your situation and needs, unexpected changes can alter your financial plans. In such circumstances you may have to contemplate cancelling your life insurance policy. This is a big decision which no one should take lightly, and there are larger financial repercussions one should consider before they make major adjustments to their coverage.
- Cancelling your life insurance means losing your current premium costs. Re-obtaining insurance later may be costly.
- If you have permanent or whole life insurance with an investment component, take necessary precautions to ensure you are getting the maximum financial value from that cash value.
- Check with your beneficiaries and examine why you initially obtained coverage before taking the final steps to cancel your life insurance policy.
What is life insurance?
Life insurance is an agreement between yourself and an insurance company where you agree to pay them a monthly rate (or premium) in exchange for a lump-sum of tax-free money that will be distributed to your beneficiary(ies) should you pass away during your coverage period. There are different types of life insurance which all have different uses for varying protection needs.
For breakdown of exactly how life insurance works, please read our Honest Guide to Life Insurance. For more specific information on different types of life insurance, you may find the following articles helpful:
Why might you cancel your life insurance policy?
There are several reasons one might feel they need to cancel their life insurance policy. One of the common reasons would be that their coverage needs have changed. If you purchased a large term life insurance policy to cover a mortgage debt or raising children, but have paid off that mortgage and the children have become financially independent – you may no longer need the large death benefit that you once did years ago. Instead, you may be contemplating a smaller whole life insurance to cover small debts and funeral costs once you pass.
Another common reason some contemplate cancelling their life insurance coverage is affordability. Your personal financial situation may necessitate your having to tighten your budget. If your life insurance premium is a large monthly expense, you may be forced to consider a decision to cancel your coverage to recoup those funds as a last resort.
Relatedly, some may want to cancel their current life insurance coverage because they’ve secured a better rate elsewhere. For example, you may have secured a rate for term life insurance when you were a smoker – which means much higher rates. If you have quit smoking for twelve months and are able to prove it, you may be able to get a much lower quote for life insurance – even if you are a couple of years older.
If you have a permanent life insurance policy with a cash-value component, you may feel it’s time to use that accumulation of funds elsewhere and that you are better suited utilising the cash yourself.
Whatever your consideration, make sure to consider the reason you obtained life insurance coverage in the first place. Most of us initially purchase life insurance to financially support our family members and therefore prior to contemplating a cancellation it is important to calculate what your dependents may still need, should something unexpected happen to you. While the amount may be lower than what you initially needed, it’s still good to have a figure in mind when reviewing your coverage needs.
Why you shouldn’t cancel your life insurance policy
While some circumstances may require you contemplate cancelling your insurance, there are plenty of good reasons not to cancel your coverage.
Firstly, the cost of insurance premiums rise as you age and your health changes. The rate for life insurance may be significantly higher if you cancel your coverage and realize later you still need it.
If your coverage needs have increased and you are therefore seeking new coverage, you should consider keeping the coverage you have at the lower rate, and augmenting your coverage elsewhere. Your existing policy may have optional riders that may allow you to increase coverage.
If budgetary reasons have you contemplating cancelling coverage, it may indicate how important that coverage is to those you may leave behind. In this case, you may want to look at alternatives in your budget which you can cut.
Life insurance cancellation alternatives
While your current coverage may not be the right fit at the moment, you more than likely still need coverage. Some alternatives to outright cancelling your policy are:
- Reducing your coverage – If you no longer need the full amount of coverage and only a smaller portion will do, then you can request the insurance company lower your coverage and accordingly reduce your premiums.
- Purchasing a new term life policy – If your term life policy is coming up for renewal, the renewal premiums will be significantly higher. If you still want coverage to continue and are in good health, you may want to get new coverage in place before you cancel your policy. A new policy will likely cost more, but the premium will be lower than the renewal prices.
- Converting term life to whole life coverage – If you no longer have substantial needs as earlier, you may also convert a smaller portion of the term life policy into a whole life policy, in order to give yourself lifelong coverage, albeit at a smaller amount.
- Select a less expensive option – such as replacing a whole life policy and opting for term life insurance or another option. Keep in mind however that your coverage span will also reduce should you switch from permanent to temporary coverage.
- As discussed, reaching out to your beneficiary or another family member to have them help with the financial obligation of your life insurance premiums.
- Contacting your life insurance provider and seeing what options they provide for those struggling to keep up with their payments.
- With permanent insurance, explore if there is a paid up option. In this case you could use the cash value you’ve accumulated to pay the remaining premiums.
- Speak to a broker. A licensed insurance broker can help you navigate all your options, and provide you with a complete picture of your current coverage and you may be able to find an alternative.
How to cancel your life insurance policy
Depending on your coverage type, there are several options for cancelling your life insurance policy.
If you are cancelling your life insurance, you simply contact your insurance provider by mail, phone, or online (if they offer digital fulfillment services) and let them know you want to cancel your coverage. Make sure you cancel any direct payments you may have set up through your financial institution.
While not recommended, you can alternatively stop making payments on your term life insurance policy. If your premiums are more than 30 days overdue, your provider will cancel your policy. Opting for this method may negatively affect your ability to get insured in the future.
If you are cancelling your whole life or permanent life insurance policy you have more decisions to make that we’ll get to later around cash value.
You may also have the option to sell your policy. Some third party companies purchase whole life insurance policies from covered individuals before they pass, and this buyer becomes the new beneficiary of the policy. They pocket the difference in cash between what they paid you for the policy, and what it eventually pays out upon your death.
Many life insurance companies outright ban this practice, and it is illegal in all provinces except Saskatchewan, New Brunswick, Nova Scotia, and Quebec. Sometimes referred to as stranger or investor owned insurance policies, going down this path can have adverse effects on estate and taxes after death and should be pursued carefully.
Will I get my money back if I cancel my life insurance policy?
As referenced above, this depends on timing and what type of life insurance you have.
Term life insurance: You receive no money back when you cancel term life insurance, unless you cancelled your policy during free look – the 10 day period from when your policy was delivered in which you have that time to evaluate whether you want to retain it.
Permanent life insurance: This is where you can get some cash value back on your policy depending on the policy and how long you’ve had it.
When you surrender a permanent life insurance policy there may be some cash surrender value. Keep in mind it is worth more the longer you have it. This is not only because of the accumulation of funds you’ve put into the policy, but also because you may be charged fees for surrendering the policy. These fees are steep in the first few years of the policy so that the provider can recoup their costs if you cancel early on. The fees typically reduce every year as long as you hold the policy.
The downside is that the cash value surrender can be taxed if that value is greater than the base cost of the policy (the money you contributed to the premiums).
Can your life insurance provider cancel your life insurance policy?
A life insurance company has the right to cancel your policy in some specific situations.
If you have not kept up with your life insurance premiums, there is typically a 30 day grace period (1 month after the due date) where you can pay the outstanding fees. If you do not pay your premiums by the end of this grace period, your policy will be cancelled.
If it is discovered that you have misrepresented something in your life insurance application within its first two years of coverage, your provider also has the option to cancel your policy. This can be something like omitting your smoking status or not disclosing a critical illness during medical underwriting. This 2-year window is known as the contestability period. Additionally, a life insurance provider reserves the right to cancel any policy that was approved using fraudulent information.
Who can I talk to about cancelling my life insurance policy?
Cancelling your life insurance coverage is a decision no one takes lightly. Our experienced brokers have years of experience helping Canadians evaluate their current coverage and find out where they can save money on the best coverage possible for their situation. Schedule a call today if you are contemplating cancelling your policy so they can help you make an informed decision about your coverage.
Call us at 1-888-601-9980 or book time with our licensed experts.