Whole life insurance policies are a product that won't go away any time soon. They're highly profitable for the insurance companies and, in some cases, can be a useful part of your overall financial picture. Unfortunately, they're not always bought -- or sold -- for the right reasons. If you find yourself with a policy that doesn't make good financial sense for you, you can cancel your whole life insurance.
Starting the Process
The first step in canceling or "surrendering" your policy is getting in touch with your insurer. It helps to have your policy documents nearby, in case you need to provide a policy number or other information. The company might offer to mail you the necessary documents, or you might be able to download them from its website. Some insurers send a representative to your house with the forms, to make sure you understand the terms and conditions involved in surrendering the policy. Depending how long you've had the insurance, there can be some things to think seriously about.
There are a number of costs associated with issuing a policy, aside from the paper and printing. The agent or broker receives commissions on the sale, of course. The company's underwriting department evaluates each application for risk before finalizing the premium. The company's own investment pool must be managed, to maintain enough assets to pay the policies. There are also the company's own administrative costs to be considered. Until you've paid on the policy for several years, these costs aren't fully covered. The insurance company will charge surrender fees, specified in your policy document, to recover those costs. They can be quite high during the first few years.
Growth in the Policy
Sometimes there are tax repercussions as well, depending on the age of the policy. Whole life policies have a savings component and share in the investment returns earned by the company's portfolio. Some are also "participating" policies, meaning they receive regular dividends as a share of the company's operating profits. These funds grow tax-free as long as they're held in the policy but become taxable income once you surrender it. If you've had the policy since childhood, that can be an appreciable tax burden. In fact, if the policy is that old, it might now be generating stronger returns than your current investments and could be worth hanging on to.
Completing the Process
Before you complete the surrender process, make sure you've reviewed and understand the potential costs of surrendering the policy. Whole life plans are like mortgages: they don't build equity very quickly in the early years. The surrender fees might eat up much of the cash you want to retrieve from the plan. If you're comfortable with your decision, complete and sign the surrender forms provided by your insurer. Some will ask to have your signatures witnessed, to protect against potential liability. Some companies will allow you to submit the forms in person, while others require registered mail. Your refund check will normally arrive one to three weeks after the company receives your forms.
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