Home Insurance Whole Life Insurance Cancellation – The Detailed Guide

Whole Life Insurance Cancellation – The Detailed Guide

by Cynthia
Whole Life Insurance Cancellation

Your insurance sales agent may not tell you this when selling a life insurance policy to you: but you may always cancel a whole life insurance plan.

Permanent or whole life insurance cancellation is possible if you ever feel you must sell to meet personal or medical emergencies.

No insurance company wants you to ever cancel your policy, but sometimes this may remain the only option left to anyone in the world.

A whole life insurance policy provides you coverage for your entire lifetime, and it is usually costlier when compared to other types of life insurance plans. The decision to sell or cancel your life insurance plan must not be taken lightly, it must be weighed properly with the help of licensed insurance professionals and other finance experts before you do it.

Your reasons for wanting to cancel your life insurance plan must be justifiable to all concerned, and you must have exploited alternative options before deciding to go ahead.

The reason for this is that alternative options may provide you with a lasting relief instead of selling or cancelling your plan and cancelling your plan may also cause you to lose money if not well planned or executed with assistance from industry professionals.

Why Do You Want To Cancel Your Whole Life Insurance Policy?

There must be a solid reason for everything you do with your money. You must also be able to fully convince your insurance agent of the reasons you are selling – since he might be able to proffer better alternatives to you. Below are some of the reasons people cancel their life insurance plans-

  • Unexpected Income Changes: Due to income changes, some people find they are no longer able to pay huge premiums for their whole life policy which is decidedly costlier than the term life policy. It is always better to cancel a life policy than to be unable to pay premiums and lose out on everything.
  • Switch To Cheaper Term Life Insurance: Some policyholders cancel their whole life policy with the intention of switching to a term life plan which is much cheaper. Term life has lower monthly premiums and is easier to pay if there is a permanent downturn in economic circumstances.
  • Sell To Cash Out: If you need any significant amount of funds urgently for personal or medical emergencies, you may be forced to cancel your life insurance policy. Some people need to undergo medical surgery on account of a terminal illness, and so cancel their life insurance policy to cash out their savings.
  • Accumulated Enough Wealth To Exceed Death Benefit: If fortune smiled on you and you ultimately accumulated enough wealth that exceeds your anticipated death benefit from a life insurance policy, you might want to cancel the policy since there is no point paying premiums anymore.
  • Policy Used As Liquidity For Estate Tax Exposure: This is when you reduce the applicable taxes on your property at your death so that your dependants can pay the taxes without liquidating your real estate.

There may be other reasons such as the need to re-invest in different policies with better rewards, and simply having achieved one’s financial goals.

Implication Of Surrendering Your Whole Life Policy

Cancelling your whole life policy and surrendering it means the same thing. But it has implications that must be thought through before proceeding. Cancelling or surrendering your policy means you choose to forgo any death benefit in exchange for a cash value that is assigned to the policy.

What this means in essence is that, instead of your dependants receiving the death benefit of your life insurance at your demise, you choose to cash out the money yourself for your personal use. You then receive the cash surrender value attached by your insurer to your policy at the time of the surrender.

The type and age of the policy determine its cash surrender value – which means you may earn a significant amount on it or earn only a tiny fraction. If your policy is still young and less than 10 years old, you may be charged surrender fees if you decide to surrender it and this will eat into your total cash value.

Another fact to note is that your cash surrender value will be taxed since the government considers it an income but your death benefit is not taxable.

In case you want it spelt out, you may receive a lump sum of your equity if you cancel within the first 10-20 years for a whole life insurance plan; but you will forfeit all your premium payments for a term life if you cancel or stop paying the premiums before the policy expires.

How To Cancel Your Whole Life Insurance Plan

It is best to speak to your insurance agent before you cancel your whole life plan, or simply fill out the necessary forms on their website.

For a term life insurance policy, you could simply stop paying the premiums and the policy will be considered cancelled after some time. But this is not so with a whole life insurance policy, ceasing to pay your premiums may cause your policy to lapse and you may lose out on any cash value built by the account.

Your agent will consider the alternative options you have before consenting that you surrender or cancel your whole life policy.

He may arrange for you to receive the cash value built by your premiums over the year to settle your personal problems, or to use your cash value as collateral against a bigger loan. But if the loan is not repaid, it is deducted from your death benefit, plus the loan’s interest.

So, to surrender your life insurance policy, simply speak to your agent or fill out the required form on the insurer’s website. Sometimes, your agent might arrange for you to pay a lesser premium while keeping the death benefit, with your cash value or equity covering up for the reduced premiums.

It must be noted that depending on your state of residence within the United States, you may cancel your whole life insurance policy within the first 30 days and get your premium refunded to you. For some states, you have a window period of 15 days to cancel when you buy the policy, and it is 30 days for others.

The government believes you have the right to change your mind if you are not sure you want to proceed, without any financial consequences to you.

Can Your Insurer Cancel Your Life Insurance Policy?

While this is very rare, it can happen; your insurance company can cancel your life policy under certain conditions.

If your insurer finds out that you lied on your application form, they can cancel the policy since they believe you have committed or plan to commit fraud.

If you also fail to pay your premiums, and during the grace period extended to you, the insurer may cancel out your policy for non-performance. To prevent this from happening, you may arrange for your beneficiaries or dependants to take over the premium payments if you are unable to continue.

If your dependants would not agree to this, they will not be able to claim any death benefit at your demise – unless the premiums are up-to-date. Under certain situations, you can even convert your life insurance policy to an annuity or long-term medical care policy.

Can You Sell Instead Of Cancelling Your Life Insurance Policy?

There is a difference between cancelling or surrendering your policy and selling it. When you cancel a whole life policy, the cash value it has built up is paid to you; but when you sell it, the entire policy is transferred to someone else and you get paid what you agree to with the buyer.

Surrendering or cancelling a policy is easy and straightforward, but selling a policy is much harder and more complicated.

To sell your whole life insurance plan, you either get the insurer to buy it or contract brokers to source for buyers. The buyer will definitely offer you a much lower amount than what the policy is currently worth, but it is your choice to accept or reject it.

Depending on a number of variable factors, your broker will source for buyers who will purchase the life policy from you and then claim the death benefit at your demise.

Questions To Answer Before Deciding To Cancel Your Whole Life Policy

All insurance professionals agree that the decision to surrender, cancel or sell your whole life insurance policy should not be taken lightly. Here then are some questions you must obtain quality answers to before deciding to let go of your life insurance:

  • Can my family pay the mortgage at my demise?

If you fear that your dependants cannot pay up the mortgage on your home, and they may lose the home at your death, then you might want to reconsider cancelling your life insurance policy. If you recently financed the purchase of a car and your lenders can repossess it at your death if the debts are not paid off, then you should think twice before cancelling.

  • Can my dependants complete their college/university if I die today?

If you also fear that your children will not be able to complete college or graduate from university at your demise, then you should reconsider surrendering your life insurance policy. If your children owe student loans, they may struggle for decades to repay without your assistance; so consider this before cancelling your policy.

In fact, if there are massive debts on your credit cards and your family may suffer some future financial obligations from recurring debts, you shouldn’t cancel your policy yet until those debts are resolved. If you also plan to pay for the wedding of one or two of your children in a couple of years’ time, you should hold on to your life insurance policy just yet.

  • Can my family maintain our standard living expenses without me?

No one wants his family to suffer financial hardships at his death, so you must understand your family’s economic status before cancelling your policy.

If your spouse is jobless and your family of five struggles to get by on a daily basis, then you must understand that your dependants’ well being is in jeopardy if you die anytime soon. So think twice before cancelling or surrendering your life policy.

If it is obvious that your family cannot keep up with the current living standards you enjoy at the moment, then you mustn’t surrender your policy until a future time. It is best you shoulder your family finances to eliminate all economic threats before you think of revoking your life insurance.

  • Can I trust my beneficiaries to be responsible with my legacy?

For whatever reasons, some people begin to doubt the ability of their beneficiaries to maintain their legacy when they die. If you feel that your children care less for your family legacy, then you may want to surrender your policy for personal use. Some parents prefer to donate their wealth to charities instead of leaving it to their children because they know they will waste it.

So if your children are financially independent and doing well for themselves, or you fear they will waste your legacy, you might consider cancelling your policy; or changing your beneficiaries to some other persons or trusts.

  • Has your health condition and lifestyle improved dramatically?

If you were paying a huge premium on account of some terminal illness, you might want to either reduce your premiums or cancel your policy if you are cured of the illness. If you no longer smoke or drink excessively and you are no longer at risk of sudden death, you should speak to your life insurance agent to review your policy options.

Many terminally-ill people get miraculously healed of their disease and live better lives after their medical conditions disappear. So you might want to surrender your whole life insurance or have it cancelled if this has been your recent experience – or you might find yourself paying unnecessary premiums for probable fears that no longer exist.

The above are reasons you might consider whole life insurance cancellation and the conditions under which it might be considered.

At whatever point of your decision, ensure you speak with a life insurance agent or professional to guide you before getting to the point of no return in your life insurance policy investment.

Photo by Nataliya Vaitkevich

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