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Can You Cancel Permanent Life Insurance?
Can you cancel permanent life insurance? Of course – but there’s a right way and a wrong way to do it. If you choose the wrong way, you could be missing out on thousands of dollars coming your way.
Here's what you need to know to cancel a policy and get the maximum amount of cash you may be owed.
The Wrong Way to Cancel Permanent Life Insurance
Your first instinct may be to stop making payments – but don’t do that yet. That’s the wrong way to go about this. Yes, it may seem easier in this moment, but if you have the patience to make a simple phone call, you could save yourself thousands by reclaiming your policy’s surrender value.
What You Need to Know Before You Cancel Your Policy
First things first: there are several ways to deal with a permanent policy you no longer need or can’t afford:
- Cancel it by calling your insurer and requesting the surrender value (we go over this below)
- Sell it to a third party (this called a “life settlement”, which we’ll also go over below)
- Work with an agent to replace it with more affordable coverage
The first two options result in you getting money back. The third option means your loved ones will still be covered.
We’re not even including the option to let your policy lapse because it’s a terrible idea for permanent coverage. When you let a policy “lapse,” you simply stop making payments – which effectively ends your coverage. You get zero money back for your policy if you choose this option. Any of the three options listed above are preferable since they result in you getting money back or continuing your coverage. If you care enough to look up “can you cancel permanent life insurance” online, we strongly recommend you look into options other than lapsing your policy.
What Is Surrender Value?
In insurance-speak, to “surrender” a permanent life insurance policy means cancelling it with your insurer and requesting the “surrender value” as a cash payout. That surrender value is made up of your policy’s cash value minus any surrender fees or penalties your insurer may charge.
Most policies don’t accrue much cash value in the first few years. But if you’ve had your policy for a long time, there may be thousands (or tens of thousands) of dollars in your cash value account. If you truly want to cancel permanent life insurance, make sure you do so in a way that lets you claim the portion of the cash value you’re entitled to.
We explained how to calculate cash surrender value in this post. If you’ve owned your policy for at least 10 years, we definitely recommend you check this out. The longer you’ve owned your policy, the more cash value you have – and there may be income tax implications if you cash out and claim your surrender value. This article explains what you need to know.
What Is a Life Settlement?
A life insurance policy is an asset – and just like any other asset, you can sell it. There are third-party buyers out there who purchase policies from people who no longer want or need them. The buyer takes over the payments, becomes the new owner of the policy, and collects the death benefit when the insured (that’s you) passes away. This means that the policy’s payout does not go to your beneficiaries.
There are other caveats when it comes to selling your policy.
- It can take time. Life settlement buyers usually prefer to buy from policy owners 65 and over and in poor health. In other words, they’re looking for a payout sooner rather than later.
- The amounts offered may not be very much. You may only be offered as little as 25% of the policy’s face value.
- The sale involves taxes & fees. You will likely owe tax on the amount you make from the sale. There are also probably heavy commission fees involved in the sale.
Want to learn more about life settlements? Check out this post.
The Right Way to Cancel Permanent Life Insurance
If you absolutely must cancel your policy, call your insurer to claim your policy’s surrender value. For most people, this is likely to involve less hassle and a larger payout than selling your policy.
However, since everyone’s situation is different, it may help to give us a call and let us walk you through the best options for your situation. Call us at (800) 521-7873 and tell us a bit about your current financial situation and your coverage needs, and we can explain your options.
You may want to refer back to your policy documents and read the fine print about surrendering your policy. You should have received those policy documents when you made your first payment on the policy. If you can’t find them or don’t know how to access them online, contact your insurer for details.
If you bought your policy through us, give us a call and we can get that information for you!
Other Coverage Options
You bought your policy because you saw a need – and unless that need is being met some other way, your loved ones will go without if you cancel or sell your policy. We really don’t want that to happen, to them or to you. So let’s find a way past the problem!
Here are some options that may work for you:
- Talk to your agent about options. We can help you evaluate your options and see if there’s a way to keep your policy by (a) reducing coverage or (b) using a 1035 exchange to swap it for a less expensive one.
- Use your accumulated cash value to make your payments. Even if this strategy burns through your cash value, it keeps more money in your wallet in the short term. Using this strategy literally buys you time to recover financially without losing valuable coverage. Remember, if you cancel your policy and need to repurchase a new one later, you’ll pay more because you’re older than you were when you bought your current policy.
- Cancel your permanent policy and buy a less expensive term policy. If keeping the policy simply isn’t an option for your budget, we can help you search for a less expensive term policy that keeps your loved ones protected. Once your new protection is in place, you can cancel your current policy.
Summary: Can You Cancel Permanent Life Insurance?
So…can you cancel permanent life insurance? Yes – but we want you to do it the smart way. Canceling the smart way means you either get money back or you work with us to find a way to put newer, more affordable coverage in place. Let us help – we’d love to talk to you!
