Canceling life insurance may seem tempting for those who want to save on the premiums for their policies. That's especially true since, unlike home insurance or car insurance, typically no one is required to buy life insurance.
Unfortunately, canceling a policy can have far-reaching financial consequences and leave loved ones without the important protections they need.
There are very few situations when canceling a life insurance policy might make good sense -- and anyone thinking about ending their policy should make sure they fall into one of them before ending their coverage.
The downsides of canceling life insurance coverage
There are a few big downsides to canceling a life insurance policy.
First and foremost, chances are good that people purchase life insurance only if they need it. A policy may be purchased, for example, to make sure minor children can be cared for if a parent dies or to ensure a surviving spouse will still be able to pay the bills in the event of their partner's death.
If a policy is canceled, those who were protected by it will become vulnerable to devastating financial loss. When the policy is canceled, no death benefit will be paid out if the covered person dies during the policy term. It won't matter that the policy was previously in effect or that premiums were paid -- the cancellation puts an end to the death benefit.
Second, it isn't always easy or possible to get covered again. So, someone who was thinking about temporarily canceling to save some money faces the risk of not being able to sign up for affordable coverage later. The development of pre-existing conditions or simply the aging process could result in insurers charging more or even denying coverage entirely if someone who canceled a policy reapplies for one.
If new coverage is purchased, the two-year contestability period will also reset. This applies to many insurance policies and allows an insurer to look back at the application for signs of fraud or other issues if the policyholder dies within two years of buying coverage. During the two-year contestability period, there's an increased chance loved ones won't get paid if a death happens.
When does it make sense to cancel a policy?
Because of the huge downsides of canceling life insurance, the vast majority of people who have coverage should keep it. This is true even for those looking to cut their bills. Other expenses should be reduced first in order to keep the important protection life insurance offers.
However, there is one situation when it does make sense to cancel a policy: When coverage is truly no longer needed. If loved ones no longer depend at all on the goods or services a policyholder offers, then there's no further need for insurance. Say, for example, the policyholder has paid off all debt and amassed a huge fortune in the bank that would be more than enough to provide for loved ones. That would be an example of a time a policy could be canceled.
This isn't a common scenario, though, so most people should stick with paying for life insurance in 2023 because their loved ones need the protection it offers.
Our picks for best life insurance companies
Life insurance is essential if you have people depending on you. We’ve combed through the options and developed a best-in-class list for life insurance coverage.This guide will help you find the best life insurance companies and the right type of policy for your needs. Read our free review today.
FAQs
Canceling life insurance isn't usually a good idea, as it can be hard to get a new policy. Loved ones may be dependent on the protection that life insurance provides. It might be worth it to cancel life insurance if the coverage is truly no longer needed, but this is a rare situation.
Is it a good idea to cancel life insurance? ›
You should reassess that risk regularly to see if it has changed every few years, especially if the premiums are high. You shouldn't hesitate to cancel a life insurance policy—or allow it to expire—if you've identified that you no longer need it.
When should you terminate a life insurance policy? ›
If you no longer have a need for the death benefit coverage, it may be the time to stop term life insurance coverage. This could mean your spouse no longer needs to replace your income, your children are no longer financially dependent or you paid off a debt the term life insurance would have covered.
What Suze Orman says about life insurance? ›
Suze Orman recommends that generally most people should get a 20 year term life insurance policy at 20 times your annual income. What does that mean? That means if you're 30 years old and you make $50,000 a year you should get a million dollar 20 year term life insurance policy.
At what point is life insurance not worth it? ›
Life insurance may not be worth if you have no dependents, if you have a tight budget, or if you have other plans for providing for them after your death.
What are the risks of cancelling life insurance? ›
What are the risks for cancelling your life policy? No financial assistance in times of need. Cancelling your life policy means that you'd be without coverage, and you and/or your dependents will not be able to receive financial support that your life insurance coverage would otherwise provide.
What is a good reason to cancel insurance? ›
If you decide to cancel coverage, make sure to take the proper steps to ensure that you don't have a gap in coverage. Reasons you may decide to cancel car insurance include finding cheaper rates with another insurer, moving to a new state or even having an unpleasant experience with your current insurance company.
Do I get money back if I cancel my life insurance? ›
Special exceptions
By law, if you cancel a term life insurance policy within 30 days of purchasing it, the company must refund any money you paid. In addition, if you pay some of your premiums ahead of schedule and then cancel your policy, the company should return those early pre-payments.
Is it wise to surrender life insurance policy? ›
Pros and cons surrendering your life insurance policy
Get some money back: Surrendering your policy means you'll get some money back, which is better than getting nothing. Some people may lapse their policy by choosing not to pay, but surrendering is a better option than this because it returns some value.
Do I pay taxes if I surrender my life insurance policy? ›
You won't be taxed on the entire surrender value, though. You'll be taxed on the amount you received minus the policy basis, or the total premium payment you made on the policy. This taxable amount reflects the investment gains that you took out.
Because these policies typically don't provide nearly as much money as the rosy projections suggest they will, Orman recommends just saying no to buying them. "Whole life insurance is not an investment that you want to touch on any level," she said.
What does Dave Ramsey say about life insurance? ›
Wondering what Ramsey teaches about life insurance? This article covers all the types, but let's cut to the chase: we always recommend buying term life. In particular, you want a policy that lasts 15 or 20 years with coverage that's 10-12 times your annual income.
Why millionaires are buying life insurance? ›
Wealthy people buy cash value life insurance so they can utilize it for its living benefits. Life insurance purchased by wealthy people and businesses is often used as a vehicle for providing liquidity, reducing financial liabilities, and reducing their tax profile.
What is the major problem with life insurance? ›
Coverage is temporary and will end once the term expires. Can be expensive to purchase a new policy at the end of the term, as insurance costs typically increase with age.
Why people don t want life insurance? ›
Cost. One of the most common reasons people don't buy life insurance is that they perceive it as too expensive.
What is the rule of thumb for life insurance? ›
Human Life Value*
Based on the value of your future earnings, a simple way to estimate this is to consider 30X your income between the ages of 18 and 40; 20X income for age 41-50; 15X income for age 51-60; and 10X income for age 61-65. After age 65, coverage is based on net worth instead of income.
What happens to my money if I stop paying life insurance? ›
If you stop making payments on term life insurance, the policy will lapse and end after the grace period. If your payments stop on a cash value life insurance policy, the insurer will generally use any cash value in the policy to cover the premiums. Once the cash value is exhausted, the policy will end.
Do I get premiums back if I cancel life insurance? ›
Do you get your money back if you cancel your life insurance? The answer to this is usually no. Protection insurance is a simple product that protects you financially against death and illness while you pay premiums. If you don't pay your insurance premiums, you aren't protected.
Is it wise to cash out life insurance policy? ›
It might not be wise to cash out a life insurance policy when you need money. You may want to consider how the decision will impact your family if you die without a policy or with a lower death payout due to this decision. Choosing an alternative way to access funds might make more sense for you now and in the future.
Is it worth keeping a life insurance policy? ›
If you have dependents you want to give financial support to if you pass away, life insurance can provide income protection and an inheritance legacy after you're gone. In that case, a term life insurance policy or a permanent life insurance policy could make sense.
