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How to Get Out of a Life Insurance Policy


How to Get Out of a Life Insurance Policy

Life insurance is meant to help your family avoid financial hardship if you die. But being stuck with the wrong policy, or a policy you no longer need, could cause plenty of problems while you’re alive.

“You can cancel a life insurance policy at any time,” says Jeff Root, an independent life insurance agent and owner of Rootfin Insurance Agency in Austin, Texas.

Your cancellation options vary depending on how long you’ve had the policy, your age and the type of policy — term or permanent — you have.


You have immediate buyer’s remorse: If you just bought your policy, you can back out during the “free look” period and receive a full refund. Free look periods generally last 10 days but vary by state.

You have term life insurance: You can stop paying premiums and walk away. You’ll lose the money you already paid.

You’re age 65 or younger and have a permanent life insurance policy: You can surrender the policy for its cash value, or you can exchange it for another policy or an annuity tax-free.

You’re age 65 or older and have a permanent life policy: You can surrender the policy or exchange it tax-free just like those under age 65. You can also sell the policy in a settlement.

You still need life insurance but can’t afford your premiums: You have options, which might include paying your premium with dividends or lowering your death benefit.

» COMPARE: Life insurance quotes

Use the free look period

If you have immediate regrets, you might be able to back out of a life insurance policy. “Free look” periods allow consumers a short amount of time, typically 10 days from receiving the policy, during which they can terminate it for a full refund. State rules and your policy type determine the specific period.

Within the free look period, call your agent or insurer and follow their steps to cancel the policy.

Term life insurance policy? Stop paying

You can stop paying premiums and allow a term life policy to lapse, meaning coverage will end. Note that if you decide to buy life insurance again in the future, your rates will be higher because you’ll be older and possibly less healthy.

Surrender a permanent policy

As you pay premiums, permanent life insurance policies typically accumulate cash value — that’s the investment component. If you surrender a permanent policy, your insurer will give you the surrender value, which is the cash value minus any surrender fees.

In the first few years of the policy the cash value will likely build up very slowly and not be worth surrendering. “A lot of these policies take seven to 10 years just to break even,” says Chris Huntley, an independent life insurance agent and president of Huntley Wealth and Insurance Services in San Diego.

Be aware that you might owe tax on any investment gains — as opposed to premium payments — that were part of your surrender value.

Perform a tax-free exchange

You can exchange a permanent life insurance policy for certain products tax-free.

Called a 1035 exchange, this probably won’t be a quick process, Huntley says, but it might be worth it to avoid a tax bill. You can exchange a permanent life insurance policy for:

  • An annuity
  • An annuity with a long-term care insurance rider
  • Another life insurance policy
  • A life insurance policy with a long-term care rider
  • A tax-qualified long-term care insurance policy

Take a life settlement

You might be able to sell a permanent policy in a life settlement transaction. This option is typically only available if you’re around age 65 or older and your policy’s death benefit is $100,000 or more, although there are exceptions.

In a life settlement, your insurance policy remains in force and an investor — often a bank or insurance company — becomes the policy owner and beneficiary. The investor pays the premiums and can sell the policy to another investor without telling you. You can be taxed on a portion of the settlement.

When you die, the investor receives the life insurance payout — and will want to keep in touch until then. “They will call your family, check on your health and could have access to your medical records as long as you live,” Huntley says.

You’ll often receive more money through a life settlement than surrendering a policy — but both net less than your family would receive from the payout if you died, according to the Life Insurance Settlement Association.

» MORE: Read about life settlements


Switch to paid-up statusOne type of permanent life insurance, a whole life policy, might allow you to use cash value — if you have enough — to pay all your premiums. This will decrease your death benefit.

Lower your death benefitYou can typically reduce your term or permanent policy’s face value to lower premiums, but ask your insurer for details.

Pay with dividendsIf your policy is with a mutual company, it might be eligible to earn dividends. You can use these toward your premium.

Check with your beneficiaries

“If you’ve been paying into a policy for 20 or 30 years, the best return you’re going to get is the death benefit,” says Huntley. He suggests asking beneficiaries before you get rid of a policy to see if they want to pay the premiums, since they will ultimately receive the life insurance payout.

Lacie Glover is a staff writer at NerdWallet, a personal finance website. Email: lacie@nerdwallet.com. Twitter: @LacieWrites.


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