Life insurance is meant to help your family avoid financial hardship if you die. But being stuck with a policy you no longer need or can’t afford isn’t ideal.
The good news is you can cancel your life insurance policy at any time. Your cancellation options vary depending on your age, the type of policy you have and how long you’ve held it.
» MORE: Term vs. whole life insurance
Common reasons for canceling your life insurance
These are some scenarios in which people consider canceling life insurance coverage. The best route to take comes down to your situation.
Your reason for canceling a policy | Your best options |
|---|---|
You have immediate buyer’s remorse. | If you just bought your policy, you can back out during the “free look” period and receive a full refund. Free look periods vary by state but typically last 10 to 30 days. |
You have term life insurance you no longer want. | You can simply stop paying premiums and walk away. |
You’re over 65 and have a permanent life insurance policy. | You can surrender the policy for its cash value if you no longer need life insurance coverage. You may also be able to exchange it for another policy or an annuity tax-free. You might even have the option to sell your policy in a life settlement, especially if you’re 75 or older. |
You still need life insurance but can’t afford your premiums. | You have options, which might include paying your premium with dividends or lowering your death benefit. |
You’re terminally or chronically ill. | You may be able to sell your policy with a viatical settlement. |
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How to cancel your life insurance
Here’s a closer look at the best ways to cancel a life insurance policy depending on your needs and policy type.
Canceling a term life insurance policy
🚫 Stop paying premiums
With term life insurance, your options are straightforward. You can simply stop paying premiums and allow a term life policy to lapse, meaning coverage will end.
↩️ Ask if you’re eligible for a refund
You may also be able to cancel your policy and receive a partial refund for any months you’ve paid premiums up front.
» MORE: Average life insurance rates
Canceling a permanent life insurance policy
💵 Surrender the policy
As you pay premiums, permanent policies typically build cash value. Your cash value grows over time, and once you’ve accumulated enough, you can begin to make withdrawals, borrow against it and more. If you surrender a permanent policy, your insurer will give you the “surrender value,” which is the cash value minus any surrender fees.
In the first few years of the policy, the policy will likely not be worth surrendering for the cash value since it builds slowly. You should also be aware that you might owe income tax on the amount you get from surrendering your policy if it exceeds the total you’ve paid so far in premiums.
🤝 Exchange a policy
You may be able to swap your permanent life insurance policy for a similar insurance product. This could be an annuity, long-term care insurance or even another life insurance policy, tax-free.
Called a “1035 exchange,” trading one life insurance policy for another might come in handy in a few situations. For example, maybe the reasons you bought the policy are no longer valid, or maybe the features and benefits of newer policies align better with your current needs.
It's important to work with a qualified life insurance advisor to ensure the exchange is done correctly.
Selling a life insurance policy
You might be able to sell a life insurance policy for cash. Known as a life settlement, this option is typically only available if you’re around 65 or older. Your life insurance death benefit will also need to be $100,000 or more in most cases.
In a life settlement, your insurance policy remains in force and an investor — often a bank or financial services company — becomes the policy owner and beneficiary. The investor pays the premiums and can sell the policy to another investor without telling you. You can be taxed on a portion of the money you get from the settlement.
When you die, the new beneficiary receives your policy’s death benefit. The investor has the right to check on your health and may have lifetime access to your medical records.
Alternatives to canceling your life insurance
If you still want or need life insurance, there are a few ways to adjust premiums without losing your coverage:
Switch to paid-up status.
Some types of permanent life insurance might allow you to use cash value — if you have enough — to pay your premiums. This could decrease your death benefit.
Lower your death benefit.
You can typically reduce your term or permanent policy’s face value to lower premiums, but ask your insurer for details.
Pay with dividends.
If your policy is with a mutual company, it might be eligible to earn dividends based on the insurer’s financial performance. You can funnel these funds toward your premium.
Use the cash value.
If you have a permanent life insurance policy, you may be able to use your policy’s cash value to pay premiums — so long as you’ve built up enough.
