Life insurance is a contract between you and an insurer that pays out a lump sum to your beneficiaries if you die during the term of the policy. People buy life insurance for various reasons, such as to provide financial security for their family, to cover debts or mortgages, or to leave a legacy.
But what if you change your mind about your life insurance policy? Can you cancel it and get your money back? The answer is not so simple. It depends on several factors, such as:
- The type of policy you have (term or permanent)
- The timing of your cancellation (during or after the cooling-off period)
- The terms and conditions of your insurer (refund policy, fees, charges)
In this article, we will explain how these factors affect your ability to get money back if you cancel your life insurance. We will also discuss some alternatives to cancellation that might suit your situation better. Finally, we will give you some tips on how to choose a suitable policy that meets your needs and budget.
Types of life insurance policies
There are two main types of life insurance policies: term and permanent. Term life insurance provides coverage for a specific period of time (usually between 10 and 30 years). If you die within this term, your beneficiaries will receive the death benefit. If you survive until the end of the term, your coverage will expire and you will not receive any money back.
Permanent life insurance provides coverage for your entire life (as long as you pay your premiums). It also has a cash value component that accumulates over time. You can access this cash value by surrendering your policy, borrowing against it, or withdrawing from it. However, doing so will reduce your death benefit and may incur fees or taxes.
The table below summarizes some of the features, benefits, and drawbacks of term and permanent life insurance.
| Feature | Term Life Insurance | Permanent Life Insurance |
|---|---|---|
| Coverage | For a specific period (e.g., 10, 20, or 30 years) | For your entire life |
| Premiums | Usually lower than permanent | Usually higher than term |
| Cash value | None | Accumulates over time |
| Flexibility | Limited (e.g., cannot change term length or coverage amount) | Higher (e.g., can adjust premiums or death benefit) |
| Suitability | For people who need temporary protection (e.g., until children are independent or debts are paid off) | For people who need lifelong protection (e.g., for estate planning or leaving a legacy) |
Depending on your goals and circumstances, you may prefer one type of policy over the other. For example, if you are young, healthy, and have a tight budget, you may opt for a term life insurance policy that provides enough coverage to protect your family until they are financially stable. On the other hand, if you are older, wealthy, and have a long-term vision, you may choose a permanent life insurance policy that offers more benefits and flexibility.
Cancellation during the cooling-off period
The cooling-off period is a time frame during which you can cancel your life insurance policy for any reason and get a full refund of any premiums you have paid. The length of the cooling-off period varies depending on the type of policy and the state you live in. For most life insurance policies, the cooling-off period is 30 days. However, for some policies, such as travel insurance that lasts less than one month, the cooling-off period may be shorter or non-existent.
The cooling-off period starts from the date your policy begins or the date you receive your policy documents, whichever is later. To cancel your policy during the cooling-off period, you need to contact your insurer as soon as possible and inform them of your decision. You can do this by phone, email, or letter. You should also provide your policy number and personal details.
If you cancel your policy during the cooling-off period, you should get a full refund of any premiums you have paid. However, your insurer may deduct a small amount to cover the days when your policy was in force. They may also charge you an administration fee for processing your cancellation.
Cancellation after the cooling-off period
If you want to cancel your policy after the cooling-off period, you should check your policy documents and contact your insurer to find out their cancellation policy and procedures. Depending on the type of policy you have and how long you have been paying premiums, you may or may not get money back if you cancel your life insurance.
Cancelling a term life insurance policy
If you have a term life insurance policy and you cancel it after the cooling-off period, you will not get any money back. This is because term life insurance does not have a cash value component that builds up over time. You only pay for the protection that you need for a specific term. If you cancel before the end of the term, you will lose the protection and forfeit any premiums you have paid.
However, cancelling a term life insurance policy does not usually involve any fees or penalties. You simply stop paying your premiums and your coverage will end. You will not owe anything to your insurer or receive anything from them.
Cancelling a permanent life insurance policy
If you have a permanent life insurance policy and you cancel it after the cooling-off period, you may get some money back. This is because permanent life insurance has a cash value component that accumulates over time. If you surrender your policy (i.e., terminate it and give up your coverage), you will receive the surrender value of your policy. The surrender value is the amount of cash value that is available to you at the time of cancellation.
However, cancelling a permanent life insurance policy can be costly and complicated. You may have to pay fees or charges for surrendering your policy, such as surrender charges (a percentage of your cash value that decreases over time), administrative fees (a flat fee for processing your cancellation), or market value adjustments (a positive or negative adjustment based on the performance of your policy’s investments). You may also have to pay taxes on any gains from your cash value that exceed your total premiums paid.
Moreover, cancelling a permanent life insurance policy can have negative consequences for your financial situation and goals. You will lose the protection and benefits that come with having a lifelong coverage, such as tax-deferred growth, tax-free death benefit, and access to cash value. You will also lose any dividends or bonuses that your insurer may pay to eligible policyholders. Furthermore, if you want to buy another life insurance policy in the future, you will likely face higher premiums due to your age and health status.
As you can see, the amount of money you can get back or lose if you cancel your permanent life insurance policy depends on several factors. You should carefully review your policy documents and consult your insurer or a financial advisor before making any decision.
Alternatives to cancellation
Cancellation is not always the best option if you are unhappy with your life insurance policy or want to save money. There are other alternatives that might suit your situation better and allow you to keep some or all of your coverage and benefits. Some of these alternatives are:
- Reducing or increasing your cover: You may be able to adjust the amount of coverage you have according to your changing needs and budget. For example, if you have a term life insurance policy, you may be able to reduce your coverage amount and lower your premiums. Or, if you have a permanent life insurance policy, you may be able to increase your coverage amount and use your cash value to pay for the extra premiums.
- Switching to a different policy or insurer: You may be able to switch to a different type of policy or a different insurer that offers better features, benefits, or rates. For example, if you have a term life insurance policy that is about to expire, you may be able to convert it to a permanent life insurance policy without having to undergo medical underwriting. Or, if you have a permanent life insurance policy that has high fees or charges, you may be able to exchange it for another policy that has lower costs or better performance.
- Selling your policy: You may be able to sell your policy to a third party (such as a life settlement company) for more than its surrender value. This is called a life settlement. A life settlement can provide you with a lump sum of cash that you can use for any purpose. However, there are some drawbacks and risks involved in selling your policy. For example, you will lose your coverage and benefits, you may have to pay taxes and fees on the proceeds, and you may compromise your privacy and security.
- Borrowing against your policy: You may be able to borrow money from your insurer using your policy’s cash value as collateral. This is called a policy loan. A policy loan can provide you with a quick and easy source of funds that you can use for any purpose. However, there are some disadvantages and consequences of borrowing against your policy. For example, you will have to pay interest on the loan, you will reduce your cash value and death benefit, and you may trigger a taxable event if the loan exceeds the premiums paid.
Tips for choosing a suitable policy
The best way to avoid regretting or cancelling your life insurance policy is to choose a suitable one in the first place. Here are some tips on how to do that:
- Assess your needs and budget: Before buying a life insurance policy, you should determine how much coverage you need, how long you need it for, and how much you can afford to pay. You can use online calculators or worksheets to help you estimate these factors. You should also consider your personal and financial goals, such as paying off debts, saving for retirement, or leaving a legacy.
- Compare different policies and insurers: Once you have an idea of what kind of policy you want, you should shop around and compare different policies and insurers. You should look at the features, benefits, costs, and ratings of each policy and insurer. You can use online tools or brokers to help you find and compare policies. You should also read the policy documents carefully and ask questions if anything is unclear.
- Review your policy regularly: After buying a life insurance policy, you should review it regularly and make sure it still meets your needs and budget. You should also update your policy if there are any changes in your life, such as getting married, having children, or retiring. You can contact your insurer or a financial advisor to help you review or update your policy.
Key Takeaways
- Whether you can get money back if you cancel your life insurance policy depends on the type of policy, the timing of cancellation, and the terms and conditions of your insurer.
- Term life insurance policies do not have a cash value component and do not offer any refunds if you cancel them after the cooling-off period.
- Permanent life insurance policies have a cash value component that accumulates over time and may offer some refunds if you surrender them after the cooling-off period. However, surrendering a permanent life insurance policy can be costly and complicated.
- There are alternatives to cancellation that might suit your situation better, such as reducing or increasing your cover, switching to a different policy or insurer, selling your policy, or borrowing against your policy. However, these alternatives also have pros and cons that you should consider carefully.
- The best way to avoid regretting or cancelling your life insurance policy is to choose a suitable one that meets your needs and budget. You should also review your policy regularly and update it if necessary.