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Can I Cancel a Life Insurance Policy?

Life insurance offers peace of mind to people who worry that their loved ones will suffer financially after the policyholder has passed away. The proceeds from a life insurance policy can be used to pay off funeral expenses, existing medical bills and living expenses for the surviving family members. For many individuals, providing financial security to a spouse and children is well worth the expense of monthly life insurance premiums. For other people, the monthly cost of life insurance is better spent on other day-to-day necessities.

With the current economic turmoil, many people are losing jobs and forced to re-evaluate their spending habits. Many unnecessary expenses must be trimmed from tight budgets, and for some, life insurance is a luxury. The question, then, is can you cancel a life insurance policy?

Depending upon what type of policy you have, canceling will be easier or more complex. There are two main types of life insurance policies, and the rules for canceling each are different:

Term Life Insurance

With a term life insurance policy, you agree to pay a specified premium each month for a specific period of time; if you die at any point during that term, your total death benefit is paid out to your beneficiaries, regardless of how much was paid in premiums. For example, if you purchase a 20-year policy of term life insurance, and die after only five years, you will still receive the full amount of your death benefits.

If you have a term life insurance policy, you can cancel the policy at any time with no negative repercussions. Additionally, if you fail to make your payments on time, the policy can lapse and you will lose coverage. Once this happens you will need to apply for a new policy, which may prove difficult if you have any preexisting conditions.

Universal Life Insurance

Universal life insurance policies differ from term policies in that they last for as long as you choose to continue paying for them. These lifetime policies are more expensive than term life insurance, but they also have a cash value. This means that out of every monthly premium you pay, a portion of the payment goes into an interest-bearing account. If you consistently pay your premiums without withdrawing cash from that account, you will reach a point where there is enough in the account to pay for your remaining policy premiums, and you no longer need to pay insurance. You can also access the funds in this account and withdraw them for daily expenses, or use the insurance as collateral for a loan.

Will I get any money if I cancel my life insurance policy?

If you decide to cancel your universal life insurance, you may be entitled to a cash-out of whatever is left in the account. Bear in mind that the cash you receive will be lower than the sum of payments you have made, as some of those payments went toward the actual cost of your premium. Additionally, because the funds you pay into a universal life policy are invested, the return on these investments may have been poor, reducing the overall value of your policy. Some life insurance policies will also come with additional cancellation fees, and if you have withdrawn money from the account you may actually owe money to make up any pro-rated payments. Check with your insurance company to confirm the exact fees that may be due at the time of cancellation.

Who can cancel a life insurance policy?

Another thing to consider when canceling your life insurance policy is identity of the policyholder. Even if you are the insured on a policy, you may not be the policyholder who purchased the initial policy. Only the person who purchased the policy, not the insured, is able to cancel a life insurance policy. For example, if your parents took out a life insurance policy on you, they must cancel it: You cannot have the policy removed on your own. In most cases, the person paying for the policy will also be the policyholder, but it’s always worthwhile to verify with your insurance company to make sure there are no issues before trying to cancel the policy.

If you currently have life insurance and are considering canceling it to make room in your budget, the best course of action is to contact your life insurance company and ask them about the specific details of your plan and if there are any limitations to canceling it. By verifying that your information is correct with your company, you avoid any unplanned complications and are able to make the most informed decision possible. In some cases, it may be worthwhile to cancel your life insurance policy and put those funds toward other expenses; in other cases, the heightened expense of obtaining a policy later in life makes that choice less attractive. The best choice is one that takes into account your needs and the needs of your family, while staying within your financial means.

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