The correct way to cancel your life insurance policy depends on the type of life insurance policy that you have. Best practices vary depending on whether you have term life insurance, whole life insurance, or universal life insurance.

How to cancel a whole life insurance policy

When you cancel a whole life policy, you may be entitled to cash surrender values (less some amount of taxes). Generally these cash surrender values grow over time, and in many whole life policies, are not guaranteed.

Before cancelling you should confirm that the growth in your cash surrender values in the short term is not larger than your premiums – if it is, you may consider holding the policy a while longer. e.g. if your current cash value is $4000, your premiums are $500/year and the cash value next year is $5000 then it makes sense to pay one more year of premiums and then cancel.  

To confirm your current and future cash values, you will need to call customer service of the life insurance company your policy is with and request an ‘inforce illustration’. The life insurance company will generate a report showing current cash values and email it to you – generally takes about a week to get the report.

Once you’ve confirmed that it’s best to cancel the policy, you’ll need to call customer service at the life company again, and request cancellation. They’ll ask you to send them the request in writing. Once the company receives the request, they’ll cancel the policy and return your cash surrender value to you.

How to cancel a universal life insurance policy

Similiar to a whole life policy, you need to confirm what your surrender value is for your universal life insurance policy. To do that, you’ll need to call the life insurance company and request an ‘inforce illustration’ which will take about a week for them to generate.

When you receive it, you’ll want to pay close attention to the difference between the ‘account value’ and the ‘surrender value’ of your policy. The account value is the current value of your investments inside the policy. The surrender value is the amount (excluding taxes that you may have to pay) you’ll receive, less surrender fees.

Surrender fees are common in universal life insurance policies in the first 10 years of the policy. If there are no surrender fees (i.e. the account value and surrender value of the policy are equal), then you can call the company and request the policy be cancelled. They’ll ask that you confirm it in writing, and once confirmed they’ll send you the surrender value less any taxes.   

HOWEVER! If you are in a position where the surrender fees are going to eat up most of your account value, you should consider setting up your policy to wait it out.   

For example, if you’re account value is $10,000 and your surrender value is $2000, then it’ll cost you $8000 to cancel the policy right now. Perhaps in 3-4 years the surrender fees are over and now your account value and your surrender value are both $10,000. Best to wait a few years and not pay the $8000 in surrender fees.

To do that, you’ll want to optimize your policy to minimize the costs while you’re waiting for the surrender fees to disappear. First, you should reduce the coverage amount to the minimum possible. This reduces the insurance costs in the policy to the minimum as well, so your payments are reduced as low as they can go. To determine the coverage amount to reduce the policy to, you’ll once again need to call the company and ask for an ‘inforce illustration of minimum premium with the coverage reduced to the minimum that will still shelter the account value.’ Once you have that illustration in hand, you can then request that the company reduce the coverage to that amount.   

In addition, you should consider changing your investment options to something like a GIC. If your account value is invested in something like equities, or something else that’s not guaranteed, then you run the risk of your investments suddenly dropping. If you place your money in a GIC linked investment inside the policy then you’ll probably earn less growth, but the investment should now be guaranteed not to drop.   

Then once you’ve waited out the surrender fee period, call the life insurance company and request cancellation. Again they’ll ask you to confirm in writing, then they’ll cancel the policy and send you your surrender value.

How to cancel a term life insurance policy

Cancelling a term life insurance policy is easy – and comes with an added benefit of 30 days of free coverage!

Your term life insurance policy comes with a grace period provision. This provision says that if you don’t pay your premiums, then after 30 days the company will cancel your policy.   

Here’s a clause from one Canadian life insurance company’s term policies – other companies will have something almost identical:

 Grace period for paying your Premiums:   If any Premium is not paid by its due date, this Policy is in default. We allow a grace period of thirty-one (31) days after the premium due date for payment of each Premium after the first. If the Premium is still unpaid at the end of the grace period, this Policy automatically terminates. If the Designated Life Insured dies during the grace period, before the Premium is paid, we will deduct the outstanding Premium from the Death Benefit.  

So here’s the correct way to cancel a term life insurance policy – don’t cancel it. Instead, put a stop payment at your bank for the premiums. The life company will not get it’s next month’s premiums from your account. They may send you a notification which you can ignore, 30 days later, they’ll cancel the policy for you. The end result is that your policy is cancelled but you got a bonus 30 days of free coverage at the end of the policy – if you passed in those 30 days the life company would still pay a claim.   

There’s no drawback to doing this, there’s no hit to your credit or surrender fees. You also have the opportunity in those 30 days to pay the last month’s premiums and continue the policy in force if you change your mind on cancelling (or if you became uninsurable in the 30 days).   

Additional Considerations

You should never cancel a current life insurance policy until you have your new policy in force – doing so leaves you open to the risk of having no insurance if the new policy declines you (this does happen occasionally and unexpectedly).   

If you are purchasing a new policy and cancelling an old policy, be aware that both policies have a claims denial provision for suicide and incontestibility for two years. You’ll be starting a new 2 year timeframe on your new policy, giving the new life insurance company the possibility of denying a claim that may not be available to your old company if two years have passed.

You should also consider very carefully when cancelling a life insurance policy, as to whether you may want that coverage in the future – or in our experience, regret not keeping the coverage. If your situation changes, or your health declines (and for most of us, our health isn’t getting better as we get older) you may want to have your current policy still in place. Just make sure you’ve carefully considered any future ramifications, because once a policy is cancelled, it’s done and there’s no getting it back.

One last consideration. If you’re cancelling a term policy in favour of permanent life insurance you should also look at the conversion option available with most term life insurance policies.  This provision allows you to switch your term life insurance coverage over to permanent life insurance with no medical exam or other requirements – it may be cheaper to do this than purchasing a new policy, and it’s certainly easier.