How To Cancel Your Life Insurance Policy

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A life insurance policy protects a person’s dependents from the uncertainties of life and provides financial aid to them in such situations. There is an abundance of life insurance policies in the market today. Insurers offer many different types of insurance policies that come with various unique features. But an individual may decide to cancel his/her policy for various reasons.

It is important for an individual to ensure that he/she is cent percent sure that he/she wishes to cancel the life insurance policy. Since the sole purpose of a life insurance policy is to provide financial security to family members, cancelling the life insurance policy will leave the family members with no such financial security. What must also be considered is the fact that a life insurance policy will cost much more if purchased at a later point in time. The reasons to cancel a policy may be many but alternative options can be considered too. If none of the options work, the individual can go ahead and cancel the life insurance policy.

Read on to find out more about life insurance policy cancellation.

Reasons for life insurance policy cancellation

Life insurance policies, though designed to offer life cover, are available under many different categories for various purposes. People might purchase a life insurance policy to create wealth, to fund their child’s education, to reduce the family’s burden of loan liability, save for their child’s wedding, etc.

If it so happens that the reason why the life insurance policy was bought, in the first place, has changed the individual might feel the need to cancel the policy. For example, a person’s child might have received a scholarship or an inheritance might have helped an individual repay a loan in advance.

Though the purpose of buying the policy might have changed, the policy still provides a life cover in case anything unfortunate were to happen to the life assured.

The most common reason for cancelling a policy is because the policyholder cannot afford the premiums.

Alternative options

If the prime reason for cancelling the policy is the fact that the premiums cannot be afforded, the policyholder can contact the insurance provider and request for a lower amount of life cover so that the premium payable also decreases. At a later stage when the individual can afford the premiums, he/she can upgrade it once again. The insurer will provide a few alternatives for the policyholder to retain the policy. If any of the alternatives are found feasible, there will be no need to cancel the life insurance policy.

What is the procedure to cancel a life insurance policy?

Every life insurance company is required to provide a 15-day free-look period at the inception of the policy for the policyholder to review the terms and conditions. If the person is unhappy with the terms, he/she can cancel the policy by stating the reasons for cancellation. The premiums paid until then are refunded after the risk premium for the period when the policy was in-force, expenses incurred on medical examination, and stamp duty charges are deducted from the refundable amount.

However, the policyholder may decide to cancel the policy at a later point in time. Here’s what he/she should do to cancel the policy:

• The insurance company should be notified about the cancellation of the policy. The company may then provide solutions so that the individual retains the policy instead of returning it.
• If the policyholder doesn’t change his/her mind, he/she will have to download the cancellation form from the official website of the bank or get a copy from any branch office.
• After the cancellation form is filled and submitted, the bank will carry out the procedure for cancelling the policy.

On cancellation/surrender of a life insurance policy, a surrender benefit may or may not be paid to the policyholder.

Under what conditions is a surrender benefit payable?

On surrender of a policy before the completion of the chosen policy term, a surrender benefit may be payable depending on the number of policy years that have been completed. Policies acquire a surrender value after a certain period of time. The time period, which can be one, two or three policy years, will be specified in the policy. After completion of the specified time period, a surrender benefit may be payable to the policyholder, provided the premiums for the specified period are paid.

Why cancellation of a life insurance policy should be avoided

While cancelling a life insurance policy might be necessary, here are a few reasons why one should consider retaining it:

• The primary purpose of buying a life insurance policy is to secure one’s family members’ financial future. Cancelling the life insurance policy will only leave the family members in a financial crisis when the earning member passes away.
• Purchasing a life insurance policy at a later point in time will cost more than what is being paid currently because with the age of the individual the risk of covering his/her life also increases. Hence, insurers charge a higher premium.
• When the policy is being cancelled, the insurer would have covered the individual’s risk until the time of cancellation. Therefore, all the premiums paid will not be refunded and only a certain amount, as decided by the insurer, after deduction of certain charges will be payable to the policyholder.
• No surrender benefit is payable if the policy is surrendered before the completion of the specified time period, which is usually 3 years, as mentioned by the insurer.
• Certain bonuses and additions require the policy to be in force for a specific period of time. If the policy is cancelled, the policyholder loses the opportunity to enjoy such benefits.
• Tax benefits under section 80C for premiums paid cannot be availed. Further, the deductions made from the gross income previously will be regarded as income in the year when the policy is surrendered.

Final word

It has been made clear that cancelling a life insurance policy isn’t the best idea for many reasons as mentioned above. Hence it is advisable to consider all the options available and decide what’s best for oneself and one’s family.