Can Life Insurance be Cancelled without Penalty

Surrender charges or administrative charges are a common feature of insurance contracts. Levying these charges enables insurers to recoup the expenses incurred in generating a policy when the insurance is cancelled. The penalties for cancelling a life insurance policy are at the discretion of the insurer. Surrender charges or penalties are primarily associated with cash-value plans. Cancellation penalties depend primarily on the insurer, the plan type and the policy duration.

Term life insurance contains no cancellation fees, even though the cost of issuing a term plan may be similar to the cost of issuing permanent life insurance. It would be impractical for an insurer to levy charges against a term plan, particularly as it would be more complicated to do so in cases where the policy owner decides not to pay. With cash-value plans, the insurer simply withholds the amount from the cash value.

Surrender charges or cancellation fees usually exist until a few years after the issue of a life insurance contract. The extent of the charges is determined by actuaries within an insurance company. Surrender charges are not the only penalties that may be incurred. The insurer may require that interest on policy loans be repaid and may have these deducted from the net cash value when the cancellation request is made.

When no cancellation penalties are levied, it is typically the case that the policy duration has surpassed the surrender charge period. The inability to reinstate a surrendered cash-value plan can be considered a penalty also. On a cash surrender non-forfeiture option, the net cash value would be paid to the policy owner. However, a policy cannot be reinstated after it is cancelled. This is a virtual surrender penalty since you cannot reverse the decision to cancel the policy after the fact. If a life insurance policy lapses, the reinstatement provision would allow you to continue the policy within a certain time frame. This would usually happen once you provide evidence of insurability and pay all due premiums.

Technically, a policy is cancelled is if it voided by the insurer. Usually, when a policy is voided, the premiums are refunded without surrender charges. There are also cases where the policy owner may wish to cancel the application before the policy is issued. This is not the same as cancelling a life insurance contract. However, the insurer may choose not to refund the payment made with the application if the expenses (cost of medical tests for e.g.) are too great. This action is at the discretion of the insurer however.