When you sign up for a life insurance policy, it might not seem like there is a way out. Perhaps after shopping around you found a more competitive option, or you’ve decided to secure your assets in another way.
No matter the case, it helps to know that you can cancel at any time and that it’s less of a hassle than you might think. You have options to cancel your whole life insurance policy, and we’re here to share a few of them with you.
What Is Whole Life Insurance?
There are many types of life insurance policies out there, mostly changing in terms of the amount of coverage one has and the duration of the term. With whole life insurance, coverage is permanent, lasting for the duration of one’s life. It stays active and policyholders pay a premium each month or each year to keep adding funds and growing what’s known as their cash value.
Unlike other types of insurance, personal or business owned whole life insurance comes with a cash value, which policyholders can take cash from in the form of a loan or pay the premium. This cash value is like an investment only free from taxes, allowing policyholders to not only pass on a death benefit but add some security to their life as their life continues.
Canceling your Whole Life Insurance Policy
Whole life insurance policies are not cheap, causing many to terminate within the first three years. There are others that hold onto the policy much longer, deciding to cancel after 10+ years. Because of the cash value and the death benefit accrued over time, insurance companies have different ways of canceling a life insurance policy.
Canceling After 2-3 Years
During the first 2 to 3 years, policyholders don’t typically have a lot of cash value saved up, which is why canceling the policy is different from one year to the next. This period is considered the surrender period, in which most insurance companies do not give back the cash value.
Instead, they apply penalties and calculate their losses for early termination, giving none of the accrued value back to the policyholder.
Canceling After 10 to 20 years
The longer time that you hold onto your policy, the less your surrender amount will be. While it might still be in double digits during your first 5 years, after 10, it could drop down to 1% or even hit 0%.
This means that policyholders can cancel without having to pay a penalty or fee to do so. The amount to surrender should be listed within the policy documents, stating exactly the amount needed to surrender.
Your Cash Value and Surrender
When you do decide to surrender, the cash value collected is paid back after all penalties and fees are paid. This amount is called the cash surrender value of your whole life policy. The amount of your cash surrender value depends on the amount of time you’ve had your policy.
Calculating your Cash Surrender Value
Cash surrender is always lower than the whole cash value amount, as there are fees involved for canceling the whole life insurance policy. The way that insurance companies calculate the surrender value is by subtracting fees charged for the management of your policy for the current cash value.
Of course, the longer you’ve had your policy, the more cash value you can have access to, even though you lose a bit to fees. It’s worth it to do some calculations and determine if canceling your policy is the right move for you and your financial future.
Cash Surrender Value and Taxes
One of the things that make whole life insurance policies attractive is the fact that they are void of taxes. This means that policyholders won’t have to pay taxes on the value accrued, something that could save them loads of money each year.
While most of the cash surrender value of a whole life policy is not subject to taxes, there is a portion that is. The way this portion is determined is by looking at the amount due to the policyholder compared to the cost basis. Any amount over the cash basis paid out is subject to taxes.
What If You Stop Paying your Policy?
With other types of coverage, policyholders have the option to stop paying their policy. If they do this, coverage is dropped, and they are no longer covered. With whole life insurance, there is so much more to consider, which is why it’s not recommended to just stop paying. Instead, you could choose any one of the following:
- Cancel the policy and cash out – Remember the amount depends on the surrender period and how much you’ve paid in.
- Shorten death benefit term – You don’t have to keep your death benefit for the duration of your plan and can instead opt for a shorter term.
- Go for a reduced option – There is also the option to reduce premiums, which will decrease the death benefit and payout after the surrender period is over.
Even if you don’t want to keep your policy or keep paying into it, it might be beneficial to keep your cash value invested and active. This will keep the premiums paid and allow you to pay them at a later date to take a break from making payments.
Accessing Cash Value
Policyholders don’t have to cancel their life insurance policy to get ahold of their cash value. Instead, they can do any one of the following:
- Withdraw – All they have to do is withdraw from their current cash value (this will reduce the death benefit)
- Take out a load – Instead of just withdrawing, policyholders can opt for a loan, paying it back to their policy.
- Sell the policy – Some insurance groups will allow policyholders to sell their policy, especially if it’s an older policy.
While it can be difficult to navigate all of your options on your own, you don’t have to with a quick call to Sim. She’ll walk you through your options and help you make better choices to secure your financial future.
FAQs & Helpful Resources Regarding Whole Life Insurance
- Should I Keep Whole Life Insurance Policy?
- When To Cash In Whole Life Insurance?
- Are The Dividends Vested in Whole Life Policy?
- Can I Buy a Whole Life Policy For My Kids or My Parents?
- Can I Convert My Term Life Insurance To Whole Life?
- Can You Have Both Term and Whole Life Insurance?
- Difference Between Participating and Non-participating Whole Life Policies
- Do I Have to Pay for Whole Life Insurance Forever or Can There Be a 10 Pay or 15 Pay Option?
- Does the Death Benefit Increase or Remain the Same in the Whole Life Policy?
- How Long Does Whole Life Insurance Last?
- How Much is Whole Life Insurance in Comparison to Term Insurance?
- How to Draw Funds from Your Whole Life Insurance Policy
- How to Use Cash Value of Whole Life Insurance
- How to Use Whole Life Insurance to Create Wealth
- Is the Whole Life Insurance Cash Value Taxable?
- Is There Any Age Limit to Buy Whole Life Policy?
- Is Whole Life Insurance a Good Investment?
- Is Whole Life Insurance Permanent?
- Should I Buy Term Life Insurance or Whole Life?
- Should I Buy Whole Life Insurance for My Child?
- Should I Cash In My Whole Life Insurance Policy While Alive?
- Should I Convert Term Insurance to Whole Life?
- Should I Get Whole Life Insurance?
- What are Paid-Up Additions in Whole Life Insurance?
- What Are the Benefits of a Whole Life Insurance Policy?
- What are the Different Options to Draw The Cash Value From the Whole Life Policy?
- What Are The Different Types of Whole Life Policies?
- What are the Features of Whole Life Insurance?
- What Happens to The Death Benefit If We Draw The Cash From The Whole Life Policy?
- What Is Cash Surrender Value on Whole Life Insurance?
- What Is Enhancement Option in Whole Life Insurance?
- What Is the Difference Between Universal and Whole Life Insurance?
- What Is the Guaranteed Cash Value and Dividend Value in the Whole Life Policy?
- What is The Taxable Benefit of Whole Life Insurance?
- What Is Whole Life Insurance Used For?
- What to Look for When Planning to Buy a Whole Life Policy?
- Where To Get Whole Life Insurance?
- Which Is Better – Term Life or Whole Life Insurance?
- Which Is Better, Term or Whole Life Insurance?
- Who Has the Best Whole Life Insurance?
- Why is Whole Life Insurance Good?
- Why Whole Life Policy is More Expensive Than Term Policy?
Other Types of Life Insurance Products You May Want To Check Out
- Business-Owned Life Insurance
- Life Insurance for Estate Planning in Canada
- Participating Life Insurance
- Term Life Insurance
- Whole Life Insurance
- Universal Life Insurance
When To Get Covered
When it comes to life insurance there really is no time that is too soon to get covered. And, this is because the younger you are, the cheaper those premiums are going to be. Not only this, but you are probably healthy right now.
If you wait until something bad happens, you will not only without a doubt face higher premiums, but you might not even be able to get covered at all.
