Life insurance is a unique form of policy that pays out claims at the end of the policyholder’s life. Instead of the policyholder receiving compensation, the premiums they pay are built toward compensation for the policyholder’s beneficiaries.
Unfortunately, you likely won’t receive any payout for your life insurance policy if the policy is cancelled before its term is over, the same way you don’t receive a payout after canceling your car insurance policy.
There are certain exceptions. Some whole life insurance policies may provide cash if the policy has a cash value. Life insurance policies typically don’t earn interest, but with a whole life insurance policy with an added cash value, this portion can earn interest over time and allow you to withdraw or borrow money you put in with premiums. You don’t have to cancel this policy in order to receive cash from it. As expected, this type of policy is typically more expensive.
If there is still cash value left on a whole life insurance policy when the policyholder passes away, that money then goes to the insurer, not the dependents. The dependents will still receive benefits from the actual life insurance policy, however. Benefits include a lump sum, called a “death benefit,” as well as compensation for funeral costs, burial expenses, shared mortgages, wage replacement and other bills that may affect the family left behind after the policyholder’s death.
Cash value is not available on term life insurance policies.
Should I Cancel My Life Insurance Policy?
There are many reasons you may cancel a life insurance policy, such as wanting to save money or other life changes. Carefully consider the ups and downs of canceling your life insurance policy. Canceling before the policy’s end can mean fees, and it means that the premiums you paid up until cancellation will not be paid out to your beneficiaries. Canceling a life insurance policy can also lead to your next policy being more expensive.
Discuss with your insurance agent and your family to discover the best course of action if you’re considering canceling your life insurance policy. Canceling a life insurance policy for a payout may not be worth the benefits, depending on how long you’ve been paying premiums and the fees you may face for canceling the policy before its term end. These rules apply to term life insurance policies as well as whole life insurance policies.