Please consider with care before cancelling your life insurance. Despite your reasons, find out what cancelling means. Understand why it’s not your best money move.

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What was the key reason you got life insurance in the first place? Your family well-being, right?

You want to cover them from any money problems they may face after your death. To keep it in force, you must pay the premiums on time, which you did! But, unfortunately, you happen to face some money trouble. As money becomes scarce, you need to cut the spending. The first cost that comes to mind is… insurance premiums, a cost that doesn’t bring an immediate return. It becomes too heavy to pay when your income shrinks during nasty times. Furthermore, you begin to consider that perhaps the premium money should be better utilized in servicing something more immediate in need… according to your friend.

You should shun these misdirecting ideas. If your family depends on you financially or if you have debts, it is imperative to get financially protected through a life insurance policy. Much more important is keeping it in force!

When you have serious doubts about something, reminding yourself why you invested your time and money in it in the first place is always beneficial. Does it still make sense now? Would you still commit to doing it now? Remembering the reasons may change your mind to ditch the policy.

(Note: I believe people buy insurance not out of their whims and fancies. The same is true for cancellation. The reason may be valid and out of necessity. But, there are options available to cater to the changes in the insured needs that do not require policy cancellation. We will discuss these in another article.)

Let’s move on to the primary purpose of this article. It’s a bad financial idea to cancel your life insurance policy. Why? Let’s explore.

1. No insurance protection for you and family

Once you drop your policy, you drop the protection. So, your family won’t get any of the death benefits when you die nor will you get medical coverage if your policy includes a medical rider. Your consistent premium payments for past years mean nothing at this point. When you cancel your policy, you cancel the coverage.

Can you reinstate it later when your finances get better? No. There is no right to reinstatement after your policy is cancelled. Meaning, if you change your mind later on, you can’t pick the policy back up where you left off.

2. Your debts will not go with you when you die

“My debts will die with me.”. Is this what you think?

I am afraid this is false thinking. After your passing, your estate will have to clear your debts. Only after that does the remainder of your estate gets distributed to your intended recipients.

So, what are your debts? It includes (in order of priority):

  • Funeral expenses
  • Executor expenses – (An executor is an individual appointed to administer the estate of a deceased person)
  • Taxes
  • Secured creditors – (A creditor having a claim that is protected by specific assets such as a bank. You may have an outstanding house loan when you die)
  • Unsecured creditor – (A creditor with a claim for which no specific assets are pledged such as suppliers)
  • The rest distributed according to a Will (your intended recipients)

As you can see, it places your family last on the list.

If you have a life insurance policy AND keep it in force, the death benefits could help pay off the debts, leaving the estate intact for your family.

3. You don’t get back fully your premiums paid

Once you ditch your term-life insurance policy, you lost all your paid premiums. But for a whole life policy or investment-linked policy, you may get back some cash surrender value.

There are two exceptions.:

  • Cancellation during the “free look period.”
    A policy has a cooling-off or free-look period. It usually between 10 to 30 days (please check your policy). If you cancel during this time, you will get back any premiums you paid earlier.
  • Your policy includes a return of premium term or rider.
    If you cancel your insurance, you’ll get 100% of the premiums you paid. — besides the charge you paid to add the rider to your coverage. The repayment will exclude administrative expenses. Remember, you can’t include this rider after signing the policy. So get it in the policy if you think you may cancel.

4. You end up paying more for insurance later on

If you think you can cancel your insurance now temporarily and buying a fresh one later at a lower premium with the same benefits, then think again. Yes, you can buy a new one, but the costs would probably be much higher.

The cost of insurance is less expensive the younger you are. In addition, as you grow older, health issues may crop up. This again will push up the premiums with additional loading, exclusions or in a worst-case scenario, it may render you uninsurable.

Changing of occupation may also affect the premium. For example, if later you change your job from an office-based to a sales position, it would attract a higher premium as the risk is higher.

While healthy, it’s easy to get cover by life insurance. When unhealthy, it can get really difficult to do so.

5. Surrender charges can be high

Giving up your whole-life and investment-linked coverage makes you miss out on the cash value growth besides surrendering charges, administration costs, and tax. What you get back might be little because of expenses and charges that you bring about for dropping the coverage.

The cash surrender value is computed based on the premium paid, investments performance and surrender fees.

Surrender fees/charges can be high if you cancel in the first few years of the policy especially for whole-life or endowment policies.

6. Peace of mind

Death can befall us in many forms through accidents and illnesses.

While death surely can’t take over your spot, the life insurance coverage will assist with guaranteeing that your family’s needs in the short and long term are dealt with.

Imagine if, without insurance coverage, your family might struggle financially to pay for immediate cost such as medical or funeral costs that can set one back by thousands of ringgit. I believe you don’t want this to happen, right?

Life coverage guarantees that your family has enough to cover these immediate costs and the rest for future necessity.

Conclusion

Putting your money into a life insurance coverage is a smart financial move. But, an even savvier decision is to keep the policy in force until maturity. Getting yourself covered is a must in an uncertain world we live in.

Life insurance is one of the best ways to take care of your family’s future financial needs by minimizing risks. Once you cancel the policy, you will lose all the potential advantages offered.

Review the current life insurance policy with the insurance provider or a qualified financial advisor before making any major adjustments such as cancellation. Options instead of cancellation may include getting cheaper term coverage, comparing between providers for lower costs, and adjusting your coverage to better meet both your needs and budget.

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Are there any other reasons you should not cancel your life insurance? Please comment.