Life Insurance Cancellation: Know When & Why Not to Cancel

A life Insurance policy provides the much-needed layer of security to you and your family should something happen to you. However, there may be times when you wish to cancel your policy. Let us look at some reasons why you should not and why you should cancel your policy.

• You have a paid your existing loans
• You cannot pay for the premiums
• Policyholder regrets having a life insurance policy
• You have found a policy which offers better coverage at an affordable rate
• You want cash value or separate your retirement investments from your life insurance, which is only possible in Whole Life Insurance

You can cancel the policy depending on the type of policy you have chosen. If you have term insurance, you can discontinue the policy anytime. However, for Whole Life Insurance, it may seem to be a tough one. You can cancel life insurance with a valid reason; however, you may not get money back.

You can cancel the life insurance plan within the free look period, immediately after the purchase of the policy. Every insurance company has a free look period of 10 to 30 days, during which if you cancel the insurance cover, you will get a refund of any premiums paid.

• Stop paying premiums: If you want to policy to be canceled, you can simply stop paying premiums. The insurance company provides a grace period during which one has to pay the premium, and if you fail to make the payment, your term insurance gets canceled.
• Write a letter: The other way out is to write a letter to the insurer that you want to discontinue the term insurance. You can also issue a stop-payment order.

As mentioned earlier, each policy type has different cancellation rules. It is not easy to cancel a Whole Life Insurance policy by stopping premium payments. You need to call the insurer initially and then you would be facing the following three scenarios:

• Cash-out the policy, if possible: At the start of the Whole Life Insurance, there is a surrender period, during which if one cancels the plan, the insured person will have to pay the penalty. The person cannot redeem any cash value. If you stop the policy in the first 10 or 20 years, you may be required to pay high fees for cash value.
• Reduced paid-up option: You can cancel the policy by not paying premiums, buy continuing to have a reduced death benefit.
• Let it lapse: If you stop making premium payment, some insurers cash out the Whole Life Insurance cover, while some prefer the let it lapse. During the lapse period, you can reinstate the policy. While reinstating the process, you will again have to go through the underwriting and pay back the premiums.

Although the cancellation process is quite simple yet, you may face difficulties while doing so. You must note that the money you have put all these years for the coverage may not be able to redeem it post discontinuation. But you need to know what could happen if you cancel the policy.

• You no longer have life insurance: Cancelling life insurance means no having life cover. This also means your family will not receive the death benefit in case of your absence. There will be no assurance of the financial security of your loved ones if you opt for cancelation.
• You forfeit your premium payments: While you invest a lot of money to avail of life insurance policy, you will not be able to claim a refund if you cancel the Term Insurance policy. However, Whole Life Insurance policy with a Cash Value may provide cash in the same case.
• You will have to reapply for new coverage: Once you stop policy and you may feel the need to apply for a new one, then the premium rates would be higher. Reapplying for new coverage can be a daunting task as you will again have to undergo a medical test, search for a suitable insurer, go through underwriting again, etc.

Yes, your insurer has the right to cancel your Life Insurance Cover subject to the following scenarios.

• Non-payment of premiums: If you stop paying premiums within the grace period, the insurance company will straightaway cancel your policy.
• Fraud: In case you have falsely claimed for death, the insurance company reserves the right to stop your life cover on the charges of fraud application

Apart from this, your insurer cannot cancel the policy if you start smoking, gain weight, or any other dangerous hobby.

When it comes to Group Life Insurance, employees can cancel the policy if they already have one. The policy gets terminated if an employee quits the job unless he/she chooses to convert it into an Individual Life Insurance policy.

If you want to cancel your existing life insurance coverage for some reason, you must first think of alternatives instead of entirely discarding the coverage. You can opt for the below options rather than canceling life insurance.

• Lower your coverage amount: If a higher premium is your biggest concern, you can ask your insurer to reduce insurance costs. This will decrease your policy premium rate as well.
• Ask for a new medical exam: If you have made some healthy lifestyle choices like quit smoking or lost weight, you can have a word with your insurer to conduct a new medical check. By leading a healthy life, your well-being can improve significantly. If there's an improvement in your body medically, your premiums can become lower.
• Arrange for the cash value of the policy to pay for the premiums (whole life only): Those who have chosen Whole Life Insurance Policy with Cash Value option ; then, you can ask your insurer whether it allows you to use the cash for the premium payment.

While there are many reasons that you should not cancel your life insurance policy, the two main reasons are:

• Your Premiums will go For Waste Cancelling term life insurance policies puts all the money that you've spent on premiums to date, to waste. Not a single rupee will be redeemable against the policy in your absence. Amount wasted on premiums on canceling a term life insurance policy is much lesser than when you cancel a whole life insurance policy . So, if you've invested in a whole life insurance policy, better stick with it till the end as its benefits are long-term.
• Your Premiums May Increase Later The premiums you have to pay for a policy directly depends on your age, your nature of the job, medical conditions, etc. If you happen to cancel your ongoing policy in plans of applying for it, later on, rest assured the value of premiums would increase.

At times, it may be apt to cancel a life insurance policy.

• When You Don't Need the Cover If you think your family can keep up with all their expenses, whether daily (like food and clothing) or periodic (like paying school or college fees), you can consider canceling your life insurance policy.
• When You Wish to Invest in a Better Policy You can also decide to cancel the life insurance policy if you are presently interested to invest in a better one. While doing so, make sure you don't cancel the present policy before activating a new policy, to be prepared for any unforeseen events in between. Also, ensure the benefits of picking up a new policy outweigh the losses that you get from letting go of the previous policy.

Life insurance policies are a step towards long-term financial planning and safeguarding your loved ones. So, make sure any decision related to the same, is not made in haste. You should not end up canceling a policy only to regret it later. And neither should you end up opting for a policy only to realize, a few months in, that you can't afford to pay the premiums. Focus on saving your money just as much as saving the future of your loved ones.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.