How to Cancel a Life Insurance Policy

Life doesn’t always follow the plan you had when you first bought life insurance. Maybe your kids are grown and financially independent. Maybe your budget has tightened. Or maybe you’ve simply decided that your current policy no longer fits your needs. Whatever the reason, canceling your life insurance might be on your mind.

You can typically always cancel a policy, but whether you walk away with money in hand, or just stop coverage, depends on the type of policy you have and when you cancel. Bankrate’s insurance experts walk through what to expect if you’re thinking about canceling, when you might get money back and what to consider before you make a final decision.

How to cancel life insurance

Life insurance is meant to offer long-term peace of mind, but sometimes plans change. That said, the process can look a little different depending on the type of policy you have and how long you’ve had it.

Term life insurance tends to be more straightforward to cancel than permanent policies, which may involve cash value and potential fees. Before you cancel, it’s worth understanding what your policy entails and what steps you’ll need to take to make the process smooth.

If you recently purchased a policy

Most life insurance policies come with a free look period, which is a grace window where you can change your mind and get a full refund. This is your chance to review the fine print and make sure the coverage still feels right — no strings attached.

Here’s what to know:

• The free look period usually lasts 10 to 30 days, depending on your state and carrier.
• If you cancel during this time, you’ll receive a full refund of any premiums paid.
• To cancel, contact your insurance company by phone, email or mail. Some carriers also allow online cancellations.

Once this window passes, cancellations may come with additional steps or financial implications — especially for permanent policies that may have accumulated cash value or have outstanding policy loans.

If you have a term life insurance policy

Term life is the simplest form of life insurance, and that simplicity usually extends to canceling the policy. You’re not dealing with cash value or surrender fees — just coverage that ends when you say so.

Here’s how to cancel a term policy:

• Stop paying premiums: If you pay manually, you can just stop. But if you’re enrolled in autopay, you’ll need to reach out to your insurer or bank to cancel automatic payments.
• Notify your insurer: Even if it’s not required, giving written notice is a good idea (e-mail is sufficient, a letter isn’t necessary). Many companies have cancellation forms or online cancellation options.
• Get it in writing: Always ask for written confirmation that your policy has been canceled (again, e-mail will suffice). This protects you from any billing errors or disputes down the road.

While canceling term life is relatively simple, it’s still worth checking with your provider to confirm the best process and whether any unused premiums will be refunded.

Alternatives to canceling a term policy 

Before you pull the plug on your term life insurance, it’s worth taking a closer look at your options. Canceling might seem like the simplest solution, but depending on why you’re considering it, there could be better ways to adjust your coverage without walking away from it completely.

• Explore policy conversion: If your needs have changed and you’re looking for lifelong coverage, check whether your term policy includes a conversion option. Many term policies come with a built-in rider that lets you switch to a permanent policy — like whole life or universal life — without a new medical exam. This can be a smart move if your health has changed and you still want to secure long-term coverage.
• Reduce your coverage amount: If your premiums feel too high, you don’t necessarily have to cancel altogether. Ask your insurer if you can lower the policy’s death benefit — this typically reduces the cost, while keeping some coverage in place for your beneficiaries.
• Talk to your agent: Your life insurance agent may be able to walk you through other ways to adjust your coverage, whether that’s tweaking the terms or helping you shop around for something that better fits your current budget and goals.

Taking a few minutes to explore these routes could help you keep some of the protection you’ve already put in place — without starting from scratch or giving it up entirely.

If you have a permanent life insurance policy

Permanent life insurance is designed to last your entire life, often up to a coverage age range of 95 to 121, depending on the policy. But if you’re thinking about canceling, know that it’s not quite as simple as just stopping your payments.

These policies typically build cash value over time, which you may be able to access if you surrender the policy. However, that payout often comes with strings attached. Early on, surrender fees can significantly reduce — or even eliminate — the amount you receive. And if you’ve taken out loans or made withdrawals, your available cash value will also be reduced by those amounts, plus any interest due.

The longer you’ve owned the policy, the more cash value you may have built — and the less you’re likely to lose to surrender charges. But because permanent life insurance is often part of a broader financial strategy, canceling it isn’t a decision to take lightly. Before moving forward, it’s worth speaking with a financial advisor to understand how surrendering your policy might affect your long-term goals.

Alternatives to canceling a permanent policy

If you’re thinking about canceling your permanent life insurance policy, consider the alternatives first. Permanent policies often come with options that might make it unnecessary to fully surrender the policy.

Using the cash value to pay the premium

One option is to use the accumulated cash value of your policy to cover your premium payments or mortality costs; this will depend on the policy type. Depending on how much cash value you’ve built up, you can withdraw or borrow against it. This could help you keep your policy active without needing to make out-of-pocket payments, especially if you’re facing financial challenges.

However, it’s important to understand the downsides of this approach. Borrowing against your cash value or withdrawing from it can reduce the death benefit your beneficiaries will receive. Additionally, if the loan isn’t repaid, the outstanding amount, plus any interest, will be deducted from the policy’s death benefit. Over time, this could diminish the policy’s value or even cause it to lapse if the cash value is depleted.

Before deciding to use the cash value to pay your premiums, it’s advisable to consult with a financial advisor or your insurance agent to fully understand how this might affect your policy in the long term and to explore any other potential options that might better suit your needs.

Prior to using the cash value to pay the premium, request an in-force illustration from the carrier reflecting your plan. This will help you determine the impact on your policy.

Tax-free exchange

A tax-free exchange, formally called a 1035 exchange, allows you to get rid of one life insurance policy and replace it with a new one without paying taxes. With a tax-free exchange, you surrender your life insurance policy, and instead of collecting the money and depositing it into your personal account, you roll it over into a new policy, therefore avoiding income taxes. If you do a 1035 exchange, be sure to follow the insurance company’s instructions, so that you don’t inadvertently end up doing it incorrectly and having the cash value be subject to income tax.

Sell your policy

When selling a life insurance policy, you typically have two options: a viatical settlement or a life settlement. The choice between these two usually depends on your health and financial needs.

• Viatical settlement: A viatical settlement involves selling your life insurance policy to a third party, often when you have a terminal illness and a life expectancy of less than two years. The buyer offers a lump sum payment that is less than the policy’s death benefit but typically more than the cash surrender value. This option can provide immediate financial relief for medical bills, living expenses or other needs during a challenging time. The buyer then assumes responsibility for paying the premiums and receives the full death benefit upon your passing.
• Life settlement: A life settlement, on the other hand, is usually considered by policyholders who are over the age of 65 and in reasonably good health but no longer need the policy or can no longer afford the premiums. In a life settlement, the policy is sold to a third party for typically more than the cash surrender value but less than the full death benefit. This option is generally for those who may need to free up cash for retirement or other financial goals.

It’s important to note that with a settlement, the third-party buyers can request your medical records to determine your estimated life expectancy. If your policy is sold, they can also reach out periodically to inquire about your health.

Both options require working with a reputable broker or settlement company, as they will handle the sale and provide you with offers. The amount you receive will depend on various factors, including your age, health and the size of your policy. Keep in mind that selling a life insurance policy can take several months, and there may be tax implications, so it’s important to consult with a financial advisor or insurance expert before proceeding.

When to cancel your life insurance policy

There are a number of reasons why you might want to cancel your life insurance policy. Here are some of the most common situations when it could make sense to stop paying for it:

• You no longer need coverage: If your family is grown and your spouse or partner is able to manage financially independently without a death benefit, life insurance may no longer need to be part of your financial portfolio.
• You are changing your investment strategy: You may have realized that the investment options of your permanent life policy are not as good as another financial vehicle for long-term savings. A financial advisor can help you determine if you would be better off with an annuity or mutual fund, for example. If you have a permanent life policy, cashing it in could give you a nest egg to invest in a higher-interest-bearing account.
• You cannot afford the premiums: If you are struggling to afford your life insurance premium, you may think about canceling your policy. Before you do, consider the options laid out above for those with financial struggles. You may be able to keep the policy in force by using one of those strategies to lower the cost of life insurance to meet your other financial obligations.
• You are switching policies or insurance companies: If you’ve found a new policy that better suits your needs, it’s important not to cancel your existing policy until the new one is fully in force and to follow the company’s life insurance policy cancellation rules. This ensures you aren’t left without coverage during the transition period, protecting you and your loved ones from unexpected gaps in protection.

It’s important to view life insurance as part of your broader financial strategy rather than as an investment vehicle. If you were hoping to use life insurance as a way to invest for the future, it might make sense to reassess your need for life insurance and instead look into more effective ways to meet your financial goals, such as investing in savings or retirement accounts. In such cases, reallocating the funds you would have spent on premiums into more growth-oriented investments could be a better option for securing your financial future.

Do you get money back when canceling life insurance?

When canceling a life insurance policy, the possibility of getting money back depends on several factors, such as the type of policy you hold and the timing of your cancellation. If you’re wondering, can I cancel my life insurance policy and get my money back, here’s a breakdown of what you can expect:

Free look period:

• Full refund: If you cancel your policy during the free look period, which typically lasts 10 to 30 days, you can get a full refund of any premiums paid. This period gives you a risk-free opportunity to reconsider your decision.

Term life insurance:

• No cash value: Term life insurance does not accumulate any cash value over time. Canceling your policy means you won’t receive a payout.
• Partial refund: However, if you cancel in the middle of your payment cycle, you might get a small refund for any unused portion of your premium.

Permanent Life Insurance:

• Cash value payout: Permanent policies build cash value over time. If you decide to cancel whole life insurance or another permanent life product, you could receive a payout based on the cash surrender value.
• Surrender charges: Be mindful that surrendering your policy, particularly in the early years, often incurs surrender charges. These fees will reduce the amount you receive.
• Outstanding loans: If you’ve borrowed against your policy, any unpaid loans will be deducted from the cash value before you receive your payout.
• Withdrawals: A withdrawal permanently reduces your policy’s death benefit and the cash surrender value.

Understanding these factors can help you make an informed decision about whether canceling your life insurance policy is the right choice for you.

Frequently asked questions

• Can you cancel a life insurance policy at any time?
  

  Yes, you can, although the only way to get a full refund is to do so during the initial “free look” period. After the free look period, if canceling a permanent life insurance policy during the first 10 years or so of owning it, you may be charged a surrender fee plus any unpaid loan balance and interest accumulation.

• How do I know when to stop term life insurance?
  

  If you no longer have a need for the death benefit coverage, it may be the time to stop term life insurance coverage. This could mean your spouse no longer needs to replace your income, your children are no longer financially dependent or you paid off a debt the term life insurance would have covered. If you do not stop your term life insurance policy, it typically will automatically cancel when the term expires. In some cases, when the level term reaches the end of the period, it may continue either with an annually increasing premium or an annually decreasing death benefit. Be sure to ask your insurer for more information.

• Can I exchange my life insurance policy for an annuity?
  

  Yes, you can. The IRS calls this a 1035 exchange, which allows you to transfer your policy into an annuity or long-term care policy income tax-free.

• Can your insurance company cancel your life insurance policy?
  

  Yes, your life insurance company can cancel your policy, but it typically only happens under specific circumstances. These include non-payment of premiums, policy misrepresentation, cash value depletion or the policy reaching maturity. If you miss a premium payment and don’t catch up within the grace period, your policy could be canceled. If it’s discovered that you provided false information during the application process, the insurer may have grounds to cancel your policy. If you have taken withdrawals or loans out against your policy’s cash value and it gets too low, your policy may be terminated.

  However, in some cases, it might be possible to reinstate your policy by paying the missed premiums and any applicable fees within a certain timeframe, though this varies by insurer. The insurer may also require proof of insurability, depending on the time frame.

• Can my beneficiaries take over my premium payments?
  

  Depending on how you arrange the payment logistics, nearly anyone could technically take over your premium payments. One way to approach this is by having your beneficiary send you the money into whichever account you currently pay your premiums out of. Another method might be to have them fill out some paperwork with your insurance company and become an official payor on your policy account.