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Before Canceling Your Whole Life Insurance Read Why You Shouldn't Cancel Your Whole Life Insurance

Why You Shouldn’t Cancel Your Whole Life Insurance

Before you cancel your whole life insurance policy, read this first. No matter your reasons, you need to know what canceling means and why it’s not usually your ideal move.

At some point, you saw the value in owning whole life. You could have sought out the protection for your family, the cash storage, the tax-advantaged growth, or the Privatized Banking element.

But now, you might be standing at a crossroads with a different perspective. If it’s begun to feel like a burden and you’re second-guessing your commitment to whole life insurance, you might be wondering how to break free.

Or you might be reading this before you purchase to guarantee that you’ll never wind up with those regrets.

The good news is this: you never need to feel like you’re stuck! Whole life insurance inherently has the flexibility to stick with you while accommodating your life changes. Rather than canceling your whole lie insurance policy if the going gets tough, you have several options to reduce payments or stop paying altogether, and still keep everything you love.

We’ll walk you through the many other options outside of canceling your whole life insurance policy.

We’ll answer:

  • What if my whole life policy isn’t ideal for Privatized Banking?
  • What if it’s too much for me to keep paying?
  • Do I have options besides canceling my whole life insurance policy?
  • How can I stop paying so much, but still keep the policy in force?
  • What are the pros, cons, and impacts of each option?
  • Under what circumstances might I want to consider these changes in funding my policy?

This conversation will show you your options. Then you can stop feeling stuck and decide what’s best for you to do. With the clarity, you’ll be able to accomplish your immediate and long-term financial goals without sacrificing either.

Where Whole Life Insurance Fits into the Cash Flow System

Whole life insurance is just one part of a bigger journey to building time and money freedom.

Livelihood Safeguard

That’s why we have created the 3-step Business Owner’s Cash Flow System. It’s your roadmap to take you from just surviving, to a life of significance, purpose, and financial freedom.

The first step is keeping more of the money you make by fixing money leaks. Then, you’ll protect your wealth with insurance, legal protection, and Privatized Banking. Finally, you’ll put your money to work, increasing your income with cash-flowing assets.

Whole life insurance is part of Stage 2: Protection.

Why You Might Be Considering Canceling Your Whole Life Insurance Policy

If you’re considering canceling your whole life insurance policy, we know you’ve given it some thought. You didn’t buy it on a whim, and chances are, you’re not attempting to cancel it on a whim either.

We talk with lots of people about their financial goals. Here are some of the reasons we’ve heard for canceling a whole life insurance policy.

Perhaps your policy has slow cash value accumulation and isn’t ideal for Privatized Banking.

Maybe you bought it before you knew about the power of Specially Designed Whole Life Insurance. Perhaps your policy isn’t designed for early cash value. Maybe it’s with a stock company and you aren’t earning the dividends you would as an owner of a mutual company.

Or, you could feel tight paying the premiums each month, quarter, or year. If your policy is taking up too much cash flow, it could be stressful to make the payments.

You may wish that instead of paying your premiums, you could do something else with that money. Maybe you would rather be paying off your mortgage or investing in something with a higher rate of return.

Maybe your kids are grown and moved out, you’re retired, your house is paid off, and you no longer feel the “need” for insurance.

Or it could be that you’re in a tight year, and don’t have the cash to pay premiums right now.

Perhaps a disability has caused income loss. With lower income, insurance might be a bill that’s now “less of a priority.”

What’s So Great About Whole Life Insurance Anyway?

When you’re having second thoughts about something, it’s often helpful to remember why you committed in the first place.

Here’s a line-up of all the things whole life insurance can do for you, even if the policy isn’t ideal:

Protection

Whole life insurance protects your family for your entire life. It gives your loved ones a death benefit to take care of them if you can’t. It fills up your net worth if you didn’t have time to create it. It’s the ideal legacy-transfer tool because your heirs don’t have to pay income tax on the proceeds.

But life insurance is not just an expense like a lifestyle cost; it’s a wealth-building cornerstone.

Cash Storage

Whole life insurance lives up to its name, giving you benefits that improve your life while you’re still alive, too!

It’s a tax-preferred savings tool, also referred to as a Rich Man’s Roth. With this cash storage system, you have money that’s liquid and usable when you want to get it quickly. That means you protect your peace of mind that you’ll always have cash value you can access. You won’t have to jump through hoops of having it stuck behind qualifications, taxes, and fees.

Whole life insurance is not an investment. It isn’t supposed to be a high-growth environment. Instead, it’s strong suits are safety and liquidity.

That being said, it does help you invest better by boosting your investment returns.

Privatized Banking

With cash value life insurance, you have money available when you find the perfect investment for you. You can borrow your cash value, using the Privatized Banking strategy to get your money working in two places at the same time.

Its guaranteed accessibility means that Privatized Banking is your ideal emergency/opportunity fund.

It helps you build your net worth and acquire cash-flowing assets, instead of focusing only on eliminating liabilities.

Additionally, in the course of living out your day-to-day life, if you find yourself in a year of tight income or facing unforeseen expenses, your cash value can come to the rescue.

Disability Benefits

And another advantage is that if you face a disability and have the waiver of premium rider on your policy, the insurance company will pay your premiums. This means that you’ll continue to enjoy all the benefits listed above, even if you can’t pay because you’re disabled.

Even if you missed adding the waiver of premium, you could still use the cash value to cover your expenses. That’s because you can use your policy’s cash value for anything, including everyday life expenses, under any circumstances.

Peace of Mind

And if your policy misses some of the high-performance design features, it still carries these pretty hefty benefits.

Cash-value life insurance gives you peace of mind, freedom, and flexibility for today and tomorrow. In fact, it’s one of the most valuable assets with the most benefits that you should keep the longest, even if immediate circumstances might make it challenging.

Canceling a Whole Life Insurance Policy

Your Policy Is a Contract

A life insurance policy is a contract between you and the insurance company.

Before Canceling Your Whole Life Insurance Read Why You Shouldn't Cancel Your Whole Life Insurance

You’ve committed to paying premiums as illustrated. They’ve committed to serving up the cash values and death benefit as shown, and scooping up the dividends on top.

Like a marriage, as long as you uphold your side of the contract, they uphold theirs. If you break your commitment to pay premiums, you’ve essentially asked for a divorce from the life insurance company. And once you drop your end of the deal, you release them from theirs. However, the policy only comes to a screeching halt if you drop them cold-turkey without warning, finding out what’s negotiable, or communicating what you want to happen.

That’s why it’s so important to communicate your wishes and intentions to the insurance company.

It’s like mediation. You want to find out what the company is willing to do, based on how long your policy has been in effect, how much cash value you have, what growth rate you have inside the policy, and the option you’ve selected for your dividends.

There are many ways to reduce payments or stop paying altogether that don’t end up terminating the policy.

What Does It Mean to Cancel a Whole Life Insurance Policy?

If you wish to break ties with the insurance company altogether and walk away from your policy, the separation is called “surrendering” your policy. At the point the policy is surrendered, the contract is void.

What Are the Downsides of Canceling Your Whole Life Insurance Policy?

When you surrender your policy, you give up your ownership rights and the policy’s assets forever. That means the insurance company is no longer on the hook to pay out the death benefit.

It also means you can’t change your mind and pick the policy back up where you left off because there are no reinstatement rights.

If you wanted life insurance again, you’d have to apply for a new policy. You’d have to go through underwriting again. Even if you’re still just as healthy as when you started the first policy, your new rates will be higher because you’re older. That means it will be more expensive for the same benefit level.

And then there’s the possibility that you haven’t maintained your health. If you’ve had a health condition crop up, it could cause your rates to go even higher or make you uninsurable.

But most importantly, since whole life insurance policies age like a fine wine, they perform better with time as they continue earning compound interest. So, trading in a whole life policy for a newer model would mean you’d be giving up the accelerated growth that comes from a tenured policy.

What Do You Get When You Cancel a Whole Life Insurance Policy?

At policy surrender, the insurance company will pay out the cash surrender value to you by check.

How much money you get back when you cancel a whole life insurance policy depends on several factors specific to your situation.

How long have you had the policy? What have you paid in? How has your policy grown? How much of your cash value have you used?

You’ll want to get an in-force illustration to find out what this dollar amount is because it could be more or less than what you’ve paid in.

Here’s why:

Over the years you owned the policy, you’ve paid in premiums. Those premiums first went to pay out the insurance company’s costs, and then were applied to the cost of insurance each year.

During the first years, you had less cash value than what you’d paid in, because of these costs. We call that a lack of liquidity in the early years.

But at some point in your policy’s life cycle, your cash value meets and then begins to exceed what you’ve paid in. The timing of this crossover point depends on many things, including your age, health, and policy design.

When you receive the check for the cash surrender value, anything you get back over and above what you put in (your cost basis), is taxable.

How Do You Cancel Your Whole Life Insurance Policy?

To cancel a whole life insurance policy, you would stop paying premiums and request a policy surrender. Your policy would then terminate immediately by nullifying the contract.

Options Besides Canceling Your Whole Life Policy

Rather than canceling your whole life insurance policy altogether, you have several options to reduce payments or stop paying altogether, while still keeping the contract intact.

Pay from Policy Values

If you have sufficient cash value and dividends, you can stop paying the premiums out of your pocket and let the policy pay for itself.

There are multiple options for this, including applying your dividends to pay the premiums or using up your cash value. In either case, the policy values will be consumed to pay the premiums.

You could pay from policy values on a short-term basis and then pick your premiums back up when your cash flow situation improves. Or you could continue paying from policy values until the money runs out.

If you opt to pay from policy values and never put in more premium, your contract will last as long as the policy values can sustain the policy.

Use a Policy Loan

Because of the guaranteed loan option, you can borrow against your cash value at any time, for any reason. That includes borrowing against your cash value to pay premiums on that same policy you borrowed against.

It could look like this. You have $100K in available cash value, with a $30K premium due. You could borrow the full premium from the insurance company, securing it against your cash value. Your entire $100K continues earning interest and dividends, but there’s a lien against $30K of that, meaning that you still have $70K in available and accessible cash value to use in another way. Your $30K policy loan will begin accruing interest, which will add to the lien.

Bonus: you don’t have to pay off the policy loan. As long as the combined total of the loan plus interest doesn’t exceed your cash value, your policy will stay in force.

When you’re ready to pay it off, you can pay interest only, installment payments, or all at once. And the portion you’ve repaid releases the lien so you can use that part of your cash value again.

Or, you could continue using policy loans to pay for your premiums, and never repay the loans. In this case, you’d extend the life of the policy a little longer, until the loan used up the full cash value.

Reduce to the Minimum Payment

There are many different ways to structure a whole life insurance policy. With most, you can pay less than the full premium.

We specially design our whole life policies for maximum early cash value and long-term growth so they can be used optimally for Privatized Banking. This design inherently provides the policy owner with lots of flexibility.

Our policies have a base premium, Paid-Up Additions (PUAs), and usually a term rider. And PUAs are not a required payment.

The minimum payment on most policies is to pay the base premium, the term rider premium, and a small portion of the PUA. That means that for a policy illustrated at $100K annual premium, if $70K of that is PUAs, the minimum premium may be approximately $30K.

Bear in mind that your PUAs contribute most to your cash values early in the policy. That means that if you don’t pay the full PUA premium, your cash value won’t grow as quickly. You also wouldn’t expect to have access to as high a percentage of your premiums.

Also, most companies require you to pay a small part of the PUA to maintain the rider. If you stop paying the PUAs altogether, you could lose the opportunity to put in the full premium in future years. I’ve seen some insurance companies require a $100 minimum PUA payment, or a minimum over a certain number of years to hold the rider open.

Reduced Paid-Up

One last resort option to end all premium payments from this day forward, without canceling your policy is to elect the reduce paid-up option in your contract.

Here’s how it works:

Paying for a whole life insurance policy is very similar to paying for a house with a mortgage. You have a $700K house that you make $3K monthly payments on. The longer you pay, the more of the house you own in terms of equity.

The death benefit is similar to the property value of the house. Your premiums are like the mortgage payment. Your cash value is like the home equity – the portion of the house you own, can use, borrow against, etc.

At any point, you can ask the insurance company how much death benefit you can purchase with your full cash value. This means the amount of death benefit that can be fully purchased, or “paid up,” with this lump sum today, so that no future premiums are due.

The insurance company will then reduce your death benefit to the level that will be fully funded at that time. You’ll see an immediate drop in death benefit. But in the years to come, you’ll see your death benefit continue to rise when you have your dividends set to purchase more PUAs.

The best thing about this is that your cash value will not drop in the process. You will see your cash value and dividend growth slow down at first when you exercise the reduced paid-up option. But fast forward a few years, and your cash value growth rate will accelerate again. It may even grow faster than if you’d continued to fund your policy fully. This is because less of your growth is paying for the cost of insurance.

A downside to using the reduced paid-up option in a policy is that you lose all of your policy riders. This includes your long term care benefits, waiver of premium, term riders, and Paid-Up Additions rider.

Avoid Losing Your Tax Advantages

Another concern is that you want to make sure you don’t MEC the policy when electing the reduced paid-up option.

A MEC stands for Modified Endowment Contract. A whole life insurance policy morphs into a MEC when you pay too much premium for that level of death benefit.

The difference is that with a non-MEC policy, loans are tax-free, as well as withdrawals up to the amount you put in. A MEC is taxable anytime you access the cash value while you’re living, whether through loans or withdrawals.

To maintain the tax-advantaged policy use, there are guidelines for how much premium can be paid per the amount of death benefit, over a given time period.

If you use the reduced paid-up option too early in the policy, you could reduce the death benefit so much that it’s not high enough in proportion to the premiums you’ve paid in.

Before electing the reduced paid-up option, you want to verify with the insurance company that doing so won’t MEC the policy.

1035 Exchange

You can use a 1035 Exchange to transfer the cash value in insurance products such as life insurance or annuities, without tax implications.

A 1035 Exchange might be a good option for you to trade out a non-ideal policy for a better one.

For instance, many IUL policies face a rate increase in later years to keep the policy in force. You may be required to pay higher premiums or cancel your policy and lose the death benefit. To make the most out of your situation, using your cash value to purchase a whole life policy may salvage your death benefit.

You would go through underwriting for the new policy, and your cost of insurance would be based on your new current age.

Life Settlement

Life settlements are an option to sell a cash value life insurance policy for more than the current cash value, but less than the death benefit.

With a life settlement, the contract is still in place on your life. But instead of you being the payor and selecting the beneficiary, another company steps into those two roles. They agree to take over your premium payments in exchange for receiving the death benefit when you pass away. To make it worthwhile to you, you’ll receive a payout of more than your cash value today, usually at least as much as you’ve paid in over the years.

This option could make financial sense for you if you’re in a policy with increasing cost of insurance and dwindling cash value (i.e., universal life policies). The premiums may be rising so quickly that they’re unaffordable, and you’d rather get something now instead of waiting and possibly end up with nothing.

Discover Your Life Insurance Policy Options

We hope that you can breathe a sigh of relief, knowing that, wherever you are with a policy today, you have options. The last thing you should feel is claustrophobic, stuck, or trapped in a dead-end.

Even if you need to change your pay structure, pay less, or stop paying altogether, you don’t have to cancel your insurance. There are many options to adjust your payments without divorcing the life insurance company and giving up the death benefit. You may even be able to use a strategic combination of the options we’ve discussed.

Specially designed whole life insurance is designed to be flexible. Its versatility allows it to fit your life changes, dancing with you, bending, dipping, and swaying right alongside you as your life changes.

If you already have a policy and have questions about your options, please reach out to us.

Your options and what’s best for you depends on your unique goals and circumstances, as well as your specific policy’s design and timing. You’ll want professional guidance to help you consider all the moving parts and the impact on your financial future.

If you want to know more about how life insurance or Privatized Banking can help you, book a Strategy Call. We’ll help you review your situation to help you decide what moves are best for you. You’ll also find out the one next thing you need to do to accelerate your path to time and money freedom.

Success leaves clues. Model the successful few, not the crowd, and build a life and business you love.

Rachel Marshall

Rachel Marshall

Rachel Marshall is the Co-Founder and Chief Financial Educator of The Money Advantage. She is known for making money simple, fun, and doable.Rachel helps her clients create time and money freedom with cash flow strategies, Privatized Banking, and alternative investments.Rachel is the co-host of The Money Advantage podcast, the popular business and personal finance show. She teaches how to keep more of the money you make, protect it, and turn it into cash-flowing assets.
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