In general, you can usually ask your insurer to cancel a life insurance policy you own.
We reviewed the Financial Consumer Agency of Canada’s cancellation guidance for what happens when you cancel a life insurance policy, the difference between cancelling a term and a permanent policy, and how to replace a life insurance policy. We also used the Autorité des marchés financiers’ replacement guidance and the Autorité’s cash-surrender-value options. Finally, we reviewed section 148 of Canada’s Income Tax Act to learn more about the potential taxable amounts from cancelling a permanent insurance policy.
Can You Cancel A Life Insurance Policy In Canada?
If you’re replacing your existing policy with a new one, don’t cancel your current policy until the new one passes underwriting, is issued, meets any delivery requirements, you agree to it, and it’s in force on the intended terms.
You can cancel if you have authority as the policyowner. You may be restricted if there is an irrevocable beneficiary or the policy has been assigned. Follow the insurer’s instructions and review your contract.
Term insurance normally has no cash value. If it’s a permanent policy, there may be a cash surrender value, policy loans and surrender charges. There may also be investment accounts and dividends.
Check These Items Before You Cancel
| Item | What to obtain or confirm | Decision risk |
|---|---|---|
| Current need and beneficiaries | Who still depends on the death benefit, how much and for how long. | A lower debt balance doesn’t necessarily mean that support, estate, tax, and/or business needs have been met. |
| Policy rights | Renewal schedule, conversion deadline, benefit-reduction option, riders, guarantees, expiry age. | Cancellation may cause a person to give up a right that cannot be recovered if a person’s health or age changes. |
| Permanent-policy values | Adjusted cost basis, current cash surrender value and guaranteed values, dividends, investment balance, any policy loans and interest, surrender charges. | The cheque payout may create taxable income and the payout may be less than the value of your account. |
| Control of the policy | Whether any beneficiary is irrevocable; policyowner; insured person; assignee. | Consent may be required from another party. |
| Replacement status | Issued contract and effective date, final premium, rating, exclusions, any delivery requirements, and written confirmation that coverage is in force. | An application, quote, conditional receipt, or expected approval is not considered to have replacement insurance in force. |
Reasons People Consider Cancelling Life Insurance
You may no longer need coverage, can no longer afford premiums, need a different amount, or already have better-fitting replacement coverage in force.
Other options include lowering your death benefit, converting, using a non-forfeiture option, or changing your premium.
The Premium Is No Longer Affordable
Find out how much it would cost to reduce the death benefit. Find out all contract provisions that would reduce or eliminate future premium requirements.
The Original Insurance Need Has Ended
If your need for a particular term policy has ended and no new need has replaced it, it’s reasonable to consider cancelling your policy. You don’t have to keep paying to wait for the term to expire.
However, before cancelling, review beneficiary designations, final expenses, debts, dependent support, business needs, and your estate’s liquidity.
You Are Replacing The Policy
Replacement is more than getting a lower-priced quote. A new application is written based on your current age and health.
Compare premium, guarantees, riders, exclusions, cash values, ownership and tax treatment. A new contract commonly restarts its contestability and suicide-exclusion periods.
Read More: Compare Life Insurance Options
What Does It Cost To Cancel Life Insurance?
There may not be a standard penalty or fee associated with policy cancellations. Check your insurance policy or request a written cancellation or surrender illustration from your insurance company.
In general, term insurance normally returns no cash value. When you surrender permanent insurance, the value you receive, net of loans, interest, withdrawals, and surrender charges, may be the policy’s cash surrender value.
Also, when there is a disposition of an interest in a life insurance policy under section 148 of the Income Tax Act, the difference between the proceeds of disposition and your adjusted cost basis may create an income inclusion. Ask your insurance company for the current adjusted cost basis as well as an estimate of the taxable gain.
Speak to a tax professional if you’re looking to surrender a material life insurance policy or if your business owns the policies.
Read More: See How Cash Surrender Value Is Calculated
Alternatives To Cancelling The Policy
Options vary by contract.
| Possible option | What it can do | What to ask before using it |
|---|---|---|
| Reduce the death benefit | Partial coverage may be kept, decreasing the required premium. | Can the change be reversed? Are there any changes to guarantees or riders? |
| Convert term insurance | If the insurance contract allows conversion of eligible term insurance to a permanent policy, no new medical evidence is required. | What is the deadline, eligible product, new premium and the maximum amount? |
| Reduced paid-up insurance | Subject to availability, you may use any available policy value to buy a smaller, permanent death benefit and stop making premium payments. | What death benefit is left? What guarantees remain? Is any of it taxable? |
| Extended term insurance | If available, policy value may be used to continue your death benefit for a limited period. You would not have to keep paying premiums. | What is the end date, and can the decision be reversed? |
| Policy loan or premium-funding option | The policy value, contractual dividends, or investment options can be used to meet a portion of the required premium obligations. | What interest rate accrues, and when? What happens if the policy is on track to lapse? How will my tax situation be affected? How will the death benefit change? What happens if the policy values go to zero? |
Read More: Compare Keeping a Life Insurance Policy With Cashing It Out
How To Cancel A Life Insurance Policy
According to the Financial Consumer Agency of Canada, cancelling your life insurance policy in Canada consists of three basic steps:
- Understand the specific steps required to cancel your policy. Review your agreement to learn more.
- Contact your insurance provider to cancel it.
- Request written confirmation of cancellation.
Before cancelling your life insurance policy, find out what happens to future payments, the effective date of termination, and any scheduled payments that may be debited automatically.
Stopping automatic payments alone does not cancel your policy. Keep your termination confirmation, surrender statement and tax slip in a safe place.
If you’re replacing your current policy with another, check whether the new policy has a rescission clause, also known as a free-look period (often 10 days), that lets you terminate the policy and receive a premium refund. Check the contract you receive from your new life insurance provider for the length of this period and instructions on how to cancel.
Read More: See How a Lapsed Life Insurance Policy May Be Reinstated
What To Include In A Life Insurance Cancellation Letter
Some insurers require their own cancellation form. In this case, follow their instructions and send the form. Otherwise, send a signed letter with your policy number and what you’re asking them to do. Unless their process requires one, you don’t need to tell them why.
Policyowner: [Full legal name]
Policy number: [Policy number]
Insurer: [Insurance company]
Date: [Date sent]
Please cancel the policy identified above effective [requested date]. Please stop all future automatic premium withdrawals and confirm the cancellation in writing. Please also confirm in writing your policy’s final value, any deductions and tax reporting, and any refund or amount payable.
Signature of policyowner: [Signature]
Contact information: [Mailing address, phone, and email]