Is There A Penalty For Cancelling Term Life Insurance?

SUMMARY

This blog explains the process of cancelling a Term Life Insurance Policy in Canada. It covers the potential penalties, such as non-refundable premiums and possible policy fees. The blog also explores alternatives to cancellation, such as converting to permanent insurance or adjusting coverage. Additionally, it discusses when to cancel, how to do it, and what happens to beneficiaries. The blog offers practical advice and insights to help readers make informed decisions about their insurance needs.

Introduction

Life is full of changes. Due to changing financial circumstances, family status or priorities, the need for life insurance sometimes changes. You may be asking yourself: Are there any penalties for cancelling Term Life Insurance? It’s a natural worry if you’re looking to purchase Term Life Insurance online or if you’re contemplating adjusting your coverage to more closely match your new life circumstances.

Here at Canadian LIC, we’ve worked with numerous clients who have been faced with this very situation. We know that cancelling your Term Life Insurance Policy can seem confusing and maybe even scary, and we’re here to help clarify the process with comprehensive, step-by-step instructions.

So, if you’re considering cancelling your policy, you’re not the only one. Let’s take a look at what you should know about potential penalties, what your coverage will do, and what you can do next.

Why Do People Cancel Their Term Life Insurance?

Before addressing the issue of penalties, it’s important to note why someone would consider cancelling their term life insurance in the first place. There are many reasons someone might think about it:

• Financial Changes: Your financial picture may have changed, and you simply can’t keep up with your monthly premiums, or you’ve decided to spend that money elsewhere.
• Life Changes: If your financial obligations, like paying off a mortgage or funding your children’s education, have been satisfied, you may no longer need coverage. Perhaps your priorities have just changed.
• They Are Better Options: Perhaps you’ve discovered a new Canadian Term Life Insurance that meets your needs more closely, or you wish to convert your term policy to permanent insurance. Changing policies is a legitimate cause to aspire to operate an old one.

Whatever reasons you have for considering cancellation, it’s key to know the full process — and whether or not you’ll be penalized for it.

Does Cancelling a Term Life Insurance Policy Involve a Penalty?

The answer to this question is usually no — in many cases, there is no direct penalty if you cancel a Term Life Insurance policy in Canada. However, as with any insurance product, there are some things to consider in the process. Here’s what you need to know:

• Non-Refundable Premiums: Most Term Life Insurance premiums are non-refundable, as opposed to certain permanent life insurance products. Even if you’ve paid your premium on a monthly or annual basis, you won’t get a refund if you decide to cancel coverage before the end of the policy term. If you’ve paid $60 a month for a year, and then you cancel, you don’t get back that $720, for example. It’s a sunk cost.
• Policy fees: It is uncommon, but some providers of Term Life Insurance may incur cancellation fees according to the policy’s terms. To not be blindsided with extra costs, it’s always wise to read the fine print of your policy and speak with your Term Life Insurance Agent about any of those potential fees.
• No Impact on Claims Already Made: Cancellation doesn’t impact claims already submitted. But you would miss out on coverage going forward, so that’s an important consideration if you cancel early.
• Future Coverage Premiums: One of the more insidious effects of cancelling your Term Life Insurance Policy is the potential impact it will have on your premiums for future coverage. If you terminate your policy to buy Term Life Insurance online, for example, later, your new premiums could be higher — particularly if your health has declined or if you’ve aged. Assertions of “pre-existing conditions” will also affect you if a certain amount of time has passed, with possible underwriting requirements that could raise costs or make coverage more difficult to secure.

What Happens to Your Beneficiaries if You Cancel Your Term Life Insurance?

Your beneficiaries are the ones who depend on your Term Life Insurance to provide for their financial future in case of your death. If you opt to cancel your policy, you take that safety net away from your loved ones. If you die after cancellation, they won’t get the payout, putting them at financial risk.

So, before cancelling, it’s important to ask yourself:

• Do I still need this coverage?
• Can I afford to replace this coverage with another type of policy?

If you’re uncertain, it could be worth waiting to share a life insurance policy until you have a new policy in place that provides comparable or better protection. You don’t want a gap in coverage that could compromise the financial well-being of your loved ones.

Alternatives to Cancelling Your Term Life Insurance

If you want to keep the coverage but need to lower your premiums or make other adjustments, several options are available besides cancelling outright:

• Convert Your Term Policy To Permanent Insurance: A number of Term Life Insurance companies in Canada offer policyholders the option to convert their term insurance into permanent insurance (whole life or universal life insurance) without requiring them to go through additional medical exams. If you are seeking long-term coverage, this is often the best option.
• Adjust Your Coverage Amount: If premiums are excessive, you may want to adjust the coverage amount. Scaling back your coverage might lower your premiums without entirely sacrificing your policy. For example, if you had a policy for $500,000 and now, perhaps because you received a raise, you wonder if you can bring it down to $200,000, your family would still have some financial protection (and you can save some money).
• Suspension of Your Policy: Some of you might be eligible to suspend your policy temporarily. This lets you pause payments without cancelling, which can be helpful if you’re experiencing a tough financial patch but intend to re-enable coverage.

When Should You Cancel Your Term Life Insurance?

Understanding when you can cancel your policy is an important component in preventing lapses in coverage or undue penalties. Here are some key tips:

• End of Term: The ideal time to cancel your Term Life Insurance Policy is when the term expires. At that stage, after already paying the premiums for that time period, cancelling won’t leave you without protection.
• After You Have Replacement Coverage: If you are switching policies, always ensure that your new coverage is effective before you cancel your old policy. This one step prevents a gap in coverage.
• Convert Before You Lose Eligibility: If your Term Life Insurance Policy has a conversion option, be sure to convert it before you are no longer eligible to do so. Some policies only allow for conversion at specific periods, so don’t wait too long.

How to Cancel Your Term Life Insurance Policy

If you’ve determined it’s time to cancel your Term Life Insurance, here’s what you should do.

• Look Over Your Policy: Read the fine print and know the terms and penalties or fees for cancellation. Now is also their chance to see if there are any refund options or conversion rights as well.
• Contact Your Agent: Contact your Term Life Insurance Agent and let them know of your decision. They will help walk you through this and let you know what the repercussions may be.
• Written Request: Most companies will require notification that you want to cancel, either by e-mail or formal letter. That will put your decision on the record.

More on Term Life Insurance

• How Long Does It Take To Get Approved For Term Life Insurance?
• Does Term Life Insurance Expire At Age 65?
• Can You Be Denied Term Life Insurance?
• How Long Does Group Term Life Insurance Last?
• Does Term Life Insurance Expire At Age 65?
• How Expensive Is Term Life Insurance?
• What Is The Rule Of Term Life Insurance?
• What Is The Waiting Period For Term Insurance?
• Is Natural Death Covered In Term Insurance?
• Should I get a 20 or 30-year Term?
• How Do I Claim Term Insurance?
• Can I Use MyTerm Life Insurance To Pay Off Debt?