You should think carefully before deciding to cancel a life insurance policy. The most obvious reason for caution is that cancellation means you and your family will lose the protection the cover offers.
But you should also bear in mind that the cost of insurance in the future – if you decide to take out cover again – could be significantly higher than with your current policy. On the other hand, a life insurance policyholder could need to cancel their policy because they have found cover from a rival provider at a better rate.
Reasons for cancelling
You may decide to cancel your life insurance policy because the reason you bought your cover has changed. For example, you wanted the policy to protect your mortgage repayments, but a windfall such as an inheritance means you can pay off your home loan early.
Or perhaps you have been able to overpay on your loan due to extra income and low interest rates. In cases such as this, you should bear in mind that even if the original grounds for setting up the policy have changed, life insurance still gives your family extra financial security if anything happens to you.
More commonly, though, people may decide to cancel their life insurance because they feel they can no longer afford the premiums.
Can you do without cover?
In a difficult economic climate, households must look at their outgoings and try to work out where cutbacks can be made. But the fact that a family is struggling to pay their life premiums could also be an indication of how important the cover actually is: the financial impact of the death of a parent in such circumstances could be devastating, making life insurance all the more important.
Policies like this can, and perhaps should, be viewed as a necessity rather than a luxury to be given up when times are hard. Cancelling cover for a temporary period, with the hope of buying a new policy at some point in the future, can also be a false economy. Life insurance is generally cheaper the younger you are when you take it out. So if you have had a policy for five years and you decide to cancel it now, your premiums will probably be much higher if you decide to reinstate the cover in two years’ time.
Added to this, you may suffer health problems in the interim, which could push the price of any future policy higher still.
If you can’t afford your premiums as they are, talk to your insurer to see if you can agree to a temporary cut in your monthly payments in return for a lower amount of cover. This means you will still be protected to some degree, and when you have enough money to go back to the higher level of cover, your premiums should be no more expensive than before.
Remember that if you smoke or are found to have taken drugs that have not been advised to your life insurance comapny this could void your policy.
How to cancel
If you have just taken out a life policy and want to cancel it for any reason, you generally have 30 days in which to do so at no charge – check the terms and conditions on your deal.
Outside of this initial period, you should simply write to your provider telling them you wish to cancel. You should be allowed to do so at no charge: you will stop paying your monthly premiums, and the cover will no longer apply.
You will generally not be entitled to any refund of premiums you have already paid. If you pay your premiums by direct debit, you should also contact your bank to cancel the direct debit.
Be sure to check our other guides for answers on such topics as "does critical illness affect your life insurance".
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