Buyer’s remorse is a feeling of regret after a large purchase. What if you’re regretting buying that whole life insurance policy someone talked you into? Or perhaps you’ve had the policy for some years and paying the premiums is a struggle every month. What can you do?
The good news is that you have options, up to and including canceling the policy altogether.
- What does Cancelling a Whole Life Insurance Policy Mean?
- Why Would You Cancel a Whole Life Insurance Policy?
- What Happens If You Simply Stop Paying the Premiums?
- What do You Get If You Cancel or Surrender the Whole Life Policy?
- Alternatives to Canceling the Whole Life Policy If You Can’t Afford the Premiums Anymore
- What do You Need to Do to Cancel Your Whole Life Insurance Policy?
What does Cancelling a Whole Life Insurance Policy Mean?
Actually, a high percentage of people who buy whole life insurance either let the policy lapse or cancel it. According to LIMRA (Life Insurance Marketing and Research Association) close to 12% lapse in the first year and 10% lapse in the second year.
If you cancel your whole life insurance policy, it means you stop paying your premiums and the insurance company no longer has to pay you a death benefit when you pass away.
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Why Would You Cancel a Whole Life Insurance Policy?
There are many reasons why you might want to cancel your whole life insurance policy.
- Whole life policy is no longer needed (savings, inheritance, no longer have dependents)
- Can no longer afford the premiums (whole life insurance is very expensive). This is probably the main reason why people want to cancel their whole life insurance policy.
- You found a better life insurance policy somewhere else. For example, if you get a guaranteed life insurance policy, for example, it offers the same death benefit for a much lower premium. Or, you could go with an indexed universal life or variable universal life policy, which offers higher cash value growth and more flexibility.
- You took out life insurance to cover a financial need that you no longer have (such a mortgage)
What Happens If You Simply Stop Paying the Premiums?
The insurance company will probably contact you, or they might even make the first few payments out of your cash value, if there is any. If you’ve built up a significant amount of cash value, they will keep paying the premiums out of the cash value until the policy lapses, which is not what you want.
What do You Get If You Cancel or Surrender the Whole Life Policy?
Surrendering in the first 1-3 years
Whole life insurance does build cash value, but it’s unlikely to have built any in the first one to three years of the policy. If you surrender the policy during the first three years, insurance companies may charge you steep surrender fees to offset all the costs of setting up the policy in the first place. Either way, you won’t get any money back, or very little money, meaning all the money you paid in premiums went directly to the insurance company.
Surrendering after 10 years or more
If you’ve had the policy for fifteen or twenty years, you’ll get the cash value you’ve spent decades building, minus fees.
What some people don’t understand is that some of that cash value may be taxable. If the cash value amount is more than what you paid in premiums over the years, you’ll be taxed on the difference. So, if I’ve paid $25,000 on my whole life insurance policy for twenty years, and now the cash value accumulated is $30,000, the surrender value that is paid out to you when you cancel the policy is likely to be $30,000. The $5,000 difference is considered taxable income.
In some cases, if you have had the policy for less than 5 years, insurance companies might impose some surrender charge, that will be taken from the $30,000 before paying out to you.
Another thing to keep in mind is that now you are without any insurance, plus you’re at least a few years older. If you decide to buy whole life insurance again, However, if you get a term life insurance policy, you’ll still pay less in premiums than you do with whole life. You could invest the difference.
Alternatives to Canceling the Whole Life Policy If You Can’t Afford the Premiums Anymore
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Reduced paid-up insurance
The insurance company calculates the amount of money you’ve paid already and figures out how large a death benefit that would give you with a single premium whole life insurance policy. The single premium is also the surrender cash value amount of your whole life policy. You won’t have to pay any more premiums, but your death benefit is reduced. This leaves you with some insurance, a lower death benefit amount, and you avoid taxes.
In this scenario, you should consider using the surrender value as a single premium payment to buy a guaranteed universal life insurance policy, which is much cheaper than whole life policies with similar guaranteed coverage. You might be able to get the same death benefit. And if having access to the cash value account is important to you, you can also buy a single premium indexed or variable universal life insurance policy as well. Again, these universal policies are much cheaper than whole life, so you might be able to get similar benefits without paying more premiums.
Consider a loan using your whole life insurance policy as collateral
If you’ve had the whole life policy for a long time and it’s built cash value, you could take out a loan against the cash value as collateral. You’ll be charged interest on the loan, and if you don’t pay it back, the death benefit will be reduced. However, if you’re in a tough financial spot that is only temporary, this might be a good solution.
Take out a loan against the cash value account of your policy
If you’ve had the policy for a long time, you can take out a loan against the cash value of your policy. Insurance companies usually charge a reasonable interest rate on the loan. They are not allowed by regulations to charge more than 8% on the loan. It will reduce your death benefit if you don’t pay back. If you’ve having a short term cash emergency, it might work for you.
Switch to a term policy
You can switch to a term life policy with the same face value by buying a single premium term life policy. Insurance companies will calculate how long the term is for you to have the same death benefit with one single premium payment.
What do You Need to Do to Cancel Your Whole Life Insurance Policy?
If none of these options work for you and you really need to cancel, you’ll need to:
- Contact your life insurance company
- Fill out the cancellation form
- Receive your cash surrender value
Remember that if your cash surrender value is more than the total amount of premiums you paid, you’ll have to pay income tax on the difference. For example, if I paid $10,000 in premiums and the cash value is $15,000 when I cancel the policy, I will owe income tax on the $5,000 that is technically profit.
Also remember, your insurance company is going to try to talk you out of surrendering your policy. If you are still open to alternatives, see if they have any that work for you. Otherwise, stand firm. It helps if you keep repeating the same phrase: “I’ve considered my options and I want to cancel the policy.”
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Last Thoughts
If you no longer need life insurance, or if the premiums become unwieldy, then it might make sense to cancel your whole life insurance policy. You can get a cheaper policy for less money if you still need life insurance.