If the Life Insurance Company Cancels My Premium Will I Get Any Money Back?

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Life insurance is a unilateral contract, meaning that the life insurance company must abide by the terms and conditions in the contract. However, you do not have any legal obligations associated with the contract. In other words, you do not have to pay the premiums on the policy. However, if you do pay premiums, the insurer must provide the promises outlined in the policy. If your premiums are not paid, you may or may not be able to get money back from your policy.

Types

There are two types of policies you might own. Term life insurance is a life insurance policy that provides basic death benefit protection in exchange for the payment of premiums. There is no cash value associated with the policy. Permanent life insurance provides both death benefits and a cash value savings which may be used during your lifetime for any purpose.

Process

The life insurance company cannot cancel your life insurance policy unless it suspects there is fraud involved. If this is the case, you will not receive any money back if there was a misrepresentation of facts on your application. If you cancel your life insurance policy and stop paying premiums, you receive back any cash value in your permanent life insurance policy. For term life insurance, you do not receive any money back unless you have a term life insurance with a return of premium feature. However, in many cases, the insurer will return only a portion of the premiums or no premiums at all if the policy is canceled before the term is complete.

The only other instance where you will receive money back, regardless of whether it is a term or permanent life insurance policy is when you cancel your policy within your state's free look period. All states allow you to look over your life insurance policy for a set number of days. Within this time period, you may return the policy and receive a refund of your first premium payment that you made when submitting the application.

Benefit

The benefit of receiving money back from your policy is that you may receive part or all of the money you've paid into the policy, depending on the policy type and the terms of the contract. This means that you haven't lost any money on the purchase of your life insurance policy.

Disadvantage

The disadvantage to canceling premium payments is that you may not receive money back from your policy. While permanent life insurance policies do build cash value, the amount of money in the policy may or may not be enough to recoup your premium costs. If there is significant cash value, then there is some benefit if you need the money. However, if the cash value of your policy is less than the total premiums paid into the policy, then this represents a losing proposition. For term life, most policies do not return premium payments to you. Return of premium features on term policies increase the cost of the policy, on average, five times over ordinary term life premiums. Additionally, by canceling premiums, you lose your life insurance policy. Since this policy insures you and protects your family, your family may be exposed to serious financial risks that were covered by your life insurance policy.

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References

  • "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
  • "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
  • "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004
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