Here’s what to consider before you do
If you’re considering cancelling a life insurance policy, think carefully before you do so. When you stop making your monthly payments, your cover will usually stop as well. If you cease making payments, either by missing an instalment or cancelling your plan, then you most likely will not be able to start again with the same plan and may have to set up a new one. Typically, this happens after two or three missed payments.
There are many reasons why people might think about cancelling their life insurance plans. They may not think that life insurance is necessary or they may feel young and healthy and that death is a long way off. They may have started a new job and have life cover as part of a package of benefits. For other people, the motivation to cancel may be that money is tight. They may be struggling financially and decide that the payments are an additional cost that can be cut to free up more room in the family budget.
However, there may be a few important reasons for you to continue with your life insurance policy. First, you won’t get any money back, because life insurance is a simple policy with no element of saving or investment, so it does not have any cash value. Second, it might be more expensive to take out a new policy if, at a later date, you decide you have more surplus income or you want the peace of mind that comes with cover. This is because life insurance typically gets more expensive as you get older. In the period between first taking out your policy and now, your health may have changed and this could affect the cost of a new life insurance plan.
Terminating a policy could leave your family, partner or household without a financial safety net. Life insurance protects your family should you die or be diagnosed with a terminal illness from which you are expected to die within 12 months. If you were to die or be diagnosed with a terminal illness while your policy was in force, your family would be able to benefit from a lump sum. This could help them stay afloat financially. So think twice before you hit “cancel life insurance”.
Getting a good deal
Life insurance is not like insuring your home or car. If you stop and start a life insurance policy you may not get such a good deal the second time around.
For example, if Susan takes out a policy in her early 20s, the cost of her life insurance will reflect her age. As the years go by, the monthly payments on any new policy that Susan takes out are likely to rise in line with her age. New medical conditions that she develops in between stopping a policy and arranging a new one will most likely be excluded from a future plan. With an existing plan, the extent of your cover and the cost of your payments are usually fixed, so you have security.
Making ends meet
It can be a false economy to cancel your monthly payments and cash in your life insurance policy. If you are struggling with your finances you may be tempted to find ways of cutting costs. It is at a time like this that people ask, “Is life insurance necessary?” or “How much life insurance do I need?” and decide they will arrange it later, perhaps when cash flow has improved or they are older. If you were to die at the same time as you were struggling with cash flow, however, your family might feel the financial pain, too.
When you need more cover
If you are thinking of cancelling a life insurance policy because you need more cover or want a longer term, it may be worth considering the options available. Seek advice on the ways to change and modify your policy before immediately cancelling.
Questions to ask yourself
So in conclusion, there are a number of things to take into consideration before deciding whether or not to cancel your plan. It may be that you have cover available elsewhere, perhaps through a scheme at work. If you are considering cancelling the policy because it is no longer meeting your needs, it may be possible to upgrade, increase or change your plan without having to cancel it completely.
Life insurance provides some financial help for your dependants and it could be a financial lifeline for your family if you were to die. For this reason, it is a good idea to think carefully before you cancel or stop paying into a plan. Having a plan in place gives you and your family peace of mind.