Ideally you pick a life insurance policy that you keep forever. However, there are times when you need to cancel. There are a couple ways to cancel. The first way is over the phone. If you cancel over the phone, the customer service rep will stop automatic payments and mail you a cancellation form. Here is the problem: customer service reps are trained in retention. For instance, they might bring up the contestability period, which is a common scare tactic.
You can bypass the customer service rep by faxing a written cancellation request (don’t forget to sign your name). You might need to call the insurance company for the correct fax number, but they will freely give that information without pushback. In your written request, you should mention the effective date of cancellation and the policy number. You should also include a statement that says your decision is final and you don’t wish to discuss it with an agent. That last part is necessary because insurance companies will sometimes call your agent so he or she can talk you out of it. If you are cancelling a policy with cash value, make sure you read my article on nonforfeiture options before you cancel.
Life insurance companies must give back the cash value of whole life policies when consumers decide to cancel. The cash value is given back in the form of payment or coverage. Insurance companies refer to this as nonforfeiture options. The three options are: cash surrender, reduced paid up, and extended term. Consumers don’t know about reduced paid up or extended term, and the insurance companies don’t mention these two options when people call in to cancel their policy. Cash surrender is usually not the best option, but people select it from a lack of knowing other options.
Cash surrender sends you a check for the cash value. Extended term provides the original amount of coverage in the form of term insurance. The duration of term coverage depends on the cash value. Reduced paid up, my favorite option, provides a reduced amount of coverage that is paid up forever. The amount of coverage depends on the cash value.
Here is the problem with cash surrenders: if you decide to buy life insurance again after doing a surrender, you are essentially starting over from scratch. However, if you buy life insurance again after doing a reduced paid up, you are starting with the coverage provided by the reduced paid up. This can be a significant cost savings. One note of caution: if you are only contemplating cancellation because of a temporary financial hardship, then you are better off taking a premium loan instead. For more life insurance topics visit our life insurance blog.
The above image is a sample of nonforfeiture values that you might see in a whole life policy. The column on the far left is the policy year. The next column to the right is the cash value, which also represents the maximum loan amount. The next column is the amount of reduced paid up insurance available. Reduced paid up values continually increase until the policy matures (usually age 121 in modern policies). The last column is extended term. You’ll notice that extended term values start to decrease after a certain policy age; the cost of term insurance starts to outpace the accumulation of cash value. You’ll also notice that no cash value accumulates during the first two years of a policy. Agent commissions are the main reason for no cash value in the first two years.
Life happens, and people either forget to make payments or they can’t make a payment. With life insurance there are some protections in place if that happens. Every life insurance policy has a 30 day grace period to catch up on a missed payment. If death occurs during a grace period, the missing payment is deducted from the death benefit. If payment isn’t made within the grace period then a statement of good health must be provided to the insurance company in order to reinstate the policy. Fortunately, most policies require automatic payment from a checking account or credit card if the policy owner opts to make monthly payments. Autopay greatly reduces the number of missed payments. Insurance companies will allow payments to be mailed in if they are on a quarterly, semi-annual, or annual basis. Very few companies allow mailed payments on a monthly basis.
Additional protections are available for whole life that aren’t available for term life. Whole life uses the plan’s cash value to extend coverage if premium payments stop. A loan can be taken against the cash value in order to make premium payments, or a nonforfeiture option can be invoked. I will discuss nonforfeiture options in a later post.