Sometimes it makes sense to cancel your life insurance. You may believe you no longer need the coverage so what is the point of paying those monthly premiums? But before your life insurance policy is cancelled consider a few things that might either change your mind or provide you with some valuable alternatives.
Cancelling Your Life Insurance Policy
In life, things change and there is absolutely nothing wrong with this.
It may be that your income has decreased over time.
Perhaps you no longer have any dependents.
Or perhaps you’re looking to move over to a cheaper life insurance policy.
Whatever the case may be, there are a few options available when it comes to cancelling your term life or whole life insurance.
(On a side note, it is interesting that one of the more popular searches regarding cancellation is how to cancel Primerica life insurance, a company that does not offer convertible term life insurance.)
Surrendering Life Insurance
First, this option is going to be perfect if you simply wish to surrender your policy and surrender all the future benefits that would have come your way.
To start the process of surrendering your policy you need to contact the life insurance company directly. From here, you will decide your last payment and then it can get a little confusing due to potential tax consequences and the age of the policy.
Age – Ultimately, not everybody gets the same options when cancelling their policy and a huge deciding factor will be how long the policy has been in force. According to a recent report, 25% of all life insurance policies are surrendered within just three years – you can’t really blame the insurance company for covering their own backs here. As a general rule, it becomes easier to obtain the full life insurance cash value the longer the policy has been in place.
Within the first three years or so, there is normally a ‘surrender’ period which may mean that you get very little to no cash back whatsoever.It also comes down to your particular whole life policy and how it was designed. High cash value policies with paid up additions earn cash accumulation much faster than ordinary whole life insurance.
Furthermore, other companies may be strict with their penalties for surrendering within a short time frame which highlights the importance of reading the fine print before you head into a life insurance policy.
After three years but still in the first decade the fee for surrendering will typically decrease with every year that passes. For example, a company might decrease the fee by one percentage point each year until finally it sits at 0% and there is no penalty.
In addition to this, we should note the ‘nonforfeiture’ options.
When you cancel a level term life insurance policy by not paying premiums, it simply ends and you lose your coverage.
However, whole life insurance is more extensive and it is harder to just ‘end’ so you may be offered some options by the company.
For example, some people use the cash value to purchase paid up life insurance, which will provide a lower paid up death benefit based on how much paid up life insurance the cash value could purchase.
Others keep the death benefit but choose to use the cash value to buy term life insurance, which will ultimately expire at the end of the set term.
And the last option is to take the cash value in the policy and cancel the life insurance policy altogether.
Of course, nonforfeiture life insurance options have been designed for those missing payments but it is also important to know if you are looking to cancel.
Before we head into option two, you also need to consider taxes. Although the cash value you receive will not count as income and will not therefore follow normal tax rules, there are a couple of exceptions.
If the cash value is over the policy’s ‘basis’, you will be taxed on the difference between the cash value and your basis in the policy. This tax can come as a big surprise to someone cancelling life insurance so it is important to be aware that it might happen.
Cash value accrues in the policy tax deferred. It will not be taxed if you withdraw the cash up to your basis or take a policy loan. However, if you withdraw an amount above your basis, such as through cancellation, you will be taxed on your gains.
Sell Your Life Insurance
If you have decided to cancel your life insurance policy because you want to withdraw all the cash value, you don’t actually have to surrender the entire contract. Not only can you reduce your death benefit and withdraw from the cash value, you can use the cash value as security on a life insurance loan, or even sell the policy to a company that buys policies.
In recent years, there has been a rise in the amount of companies looking to buy life insurance policies. Why? Because they buy it for less than the death benefit, (but more than your cash value), before receiving the death benefit after you pass away.
These life settlement companies look to buy cash value policies going to waste and make a decent profit at the end.
Viatical settlements are normally an option only available senior life insurance policyowners because the company will want to keep their risk to a minimum. Typically, they buy all policies where owners have a life expectancy of five to ten years.