As your family’s financial and material circumstances change, you may find that your life insurance needs to change too. Perhaps you’ve found yourself in a financial crunch and can no longer afford the premiums. Or maybe you hope to cash out your policy so you can meet an emergency expense.

Yet before you make a sudden and drastic change to your coverage, it’s important that you understand the implications of canceling a life insurance policy. After all, life insurance provides crucial financial security for your loved ones, so you’ll want to ensure they’re protected if the unexpected happens to you.

What to consider before you decide to cancel life insurance

Canceling life insurance is a momentous decision. Before taking the leap, make sure you weigh the consequences and consider all of your potential options.

Assess your risk

To determine whether you should cancel your insurance policy, you should first take a thoughtful look at your finances. Consider any obligations currently covered by your income, like rent, a mortgage, childcare, or utilities.

Likewise, take stock of your debts. Are your loved ones at risk of inheriting debt like a mortgage or medical bills from you? Will you be leaving any family members behind without a financial security net? If the risk seems substantial, replacing your policy with a lower-cost option might be a better choice.

Consider a replacement life insurance policy

If you can no longer afford your life insurance premiums or your plan is less than ideal for your current circumstances, consider alternative life insurance plan options.

For example, if you’re currently in the first years of a 30-year term life policy and find you can’t afford it, switching to a 10-year term life plan may be a better fit. Generally, shorter policy terms are more affordable.

Alternatively, suppose you no longer have to worry about replacing your income since you’ve retired and the kids are out of the house. In that case, you could look into a final expense plan that will cover funeral and end-of-life costs.

Before you cancel any life insurance policy, ensure another plan is in place, so your loved ones remain secure.

Be aware of potential penalties

Before you cancel life insurance, you should also review the policy terms. You might be subject to a cancellation or termination fee, especially if you have permanent life insurance with a cash value feature. Penalties for canceling permanent life insurance are usually highest within the first decade of your plan. It’s also important to understand that if you surrender your policy, you may also be subject to taxation on the payment amount.

Refer to your policy to confirm applicable cancellation-related penalties. Additionally, a licensed insurance agent can assist you with finding an alternative policy to suit your needs.

How to cancel life insurance

If you decide to cancel life insurance and have a new policy in place, it’s time to begin the termination process.

Cancelling term life insurance

Refer to your term life insurance policy to obtain instructions on how to cancel your policy. If you do not have your policy, or have additional questions, you may contact your insurer to express your intent to cancel the policy, obtain information about the cancellation process, and ask any other questions you may have.

Surrendering whole life insurance

The process of canceling a whole life insurance policy is a little more complicated. Because whole life policies build cash value, you may be entitled to the cash surrender value upon surrendering your policy. *Note: Life insurance policies typically take a few years to accumulate cash value; please refer to your policy specifications to confirm when your policy begins to accumulate cash value.

Plus, whole life policies often charge steeper penalties for termination. Generally, the younger the policyholder and the newer the policy, the more expensive surrender penalties are. In some cases, early termination fees could eat up the entire cash value of a whole life policy, leaving the policyholder without any payment. In that case, it may be better to consider an alternative.

Alternatives to canceling life insurance

If no loved ones depend on your income, or if you don’t have any dependents, it may seem like canceling life insurance makes financial sense. However, an insurance policy could still help cover the substantial end-of-life and funeral expenses your beneficiaries will ultimately face.

Even if you have enough savings to cover those expenses, life insurance policies offer the means and flexibility to leave a legacy for loved ones or a charitable organization.

While you might still decide you can no longer afford life insurance, consider these alternatives before you cancel your life insurance policy.

• If your policy no longer meets your needs, talk with your insurer – you may be able to make changes. Some insurers may offer policies that include guaranteed insurability riders that allow you to increase coverage based on major life events, like marriage and adoption. Keep in mind that increasing your life insurance coverage amount could trigger the need to reapply and submit to a medical exam. Other policies allow you to renegotiate terms. You may also be able to reduce your coverage amount or policy term until you’re in a different place financially.
• If you need to cover a sudden expense and you have a whole or permanent life insurance plan, you could take out a loan against your policy’s cash value. You don’t need to complete a complex application process to obtain these loans; typically, your insurance provider just requires a few forms. While these loans don’t count against your credit, failure to repay them results in a smaller death benefit. You’ll also need to make interest payments over the life of the loan to keep your policy in good standing. Contact your insurer if you’re unsure if you’re eligible to take a loan against your permanent life insurance policy.
• If cost is your primary concern, switching to a more affordable plan ultimately reduces your financial burden while keeping your loved ones secure. For example, a shorter-term policy offers some protection while keeping your monthly premiums low. Switching to a more affordable term life policy instead of whole life may be another option. Many policy options exist with a lower cost for great protection, so you don’t have to cancel your life insurance policy altogether. A licensed insurance agent is the best person to advise on options available to you.

Whether your budget has changed or your needs have shifted, changing or canceling your life insurance policy is a big decision. Fortunately, it’s not one you have to make alone. Even as your life changes, you can protect your loved ones from financial insecurity with an affordable life insurance policy. Fidelity Life can help you make that decision by offering you a life insurance quote for a more affordable plan.