Canceling a Whole or Permanent Life Insurance Policy if It’s Felt to Be a Mistake
- Nisha Mehta, MD
- 2 days ago
- 11 min read
Unfortunately, many doctors on our physician communities find themselves in a position where they wonder if they made a mistake purchasing a permanent life insurance policy, such as whole life insurance. Many physicians are inappropriately sold these policies from insurance salespeople that make large commissions from selling these policies. As an aside, there are a few cases where these policies may be worth considering on our article about permanent life insurance, but for most doctors, it will make more sense to purchase term life insurance and invest the difference in premiums between term and permanent life insurance policies in the stock market. Below, we’ll cover what to do if you regret purchasing a whole life insurance policy, what an ‘in force’ illustration of the policy is, and other relevant FAQs.
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Is whole life insurance (or any other permanent life insurance policy) a good idea?
We separately cover this topic in our article on whether physicians should buy whole life insurance, but the TL:DR is that these are expensive products with lots of fees, and for most people, buying term life insurance fulfills the purpose of life insurance better and is much cheaper.
In term life insurance, you pay a set annual premium for a predetermined amount of time (usually 10, 20, or 30 years), and in the event that you pass away before the policy expires, your beneficiaries will receive a tax free payout. If you don’t pass away before the policy expires, there is no residual value. It’s simple and very affordable for most physician families.
Permanent life insurance, on the other hand, is a much more complicated product that has more fees and terms and conditions, as well as being much more expensive, costing 5-15x as much for a similar death benefit as the term life insurance. As long as you keep paying the premiums, there is lifetime coverage. There is a cash value to the policy that builds while you hold it, which can be borrowed against and which grows in a tax advantaged way. However, these returns are generally very low (think 2-4%), and in most cases, it will make more sense to invest the difference in premiums between term life insurance and permanent life insurance instead, and you’ll likely end up with more money in the long run (assuming historic market returns).
Obviously, this is a more complicated discussion, and there are exceptions to every rule (including special needs cases, estate considerations, and business considerations), but the majority of doctors sold these policies on our communities express that they don’t fit into those categories.
If you need help determining what works best for you, contact one of the insurance agents for physicians on our list, who thousands of our members have used.
What do I do if I feel I’ve been inappropriately sold a whole or permanent life insurance policy, or otherwise want to cancel it?
First, pause. The knee jerk reaction may be to cancel the policy, but depending on how long you’ve held the policy, this may not be the best idea, because you may have reached a point where it makes sense to hold on to the policy. Additionally, there can be tax consequences, so you want to go through the decision methodically and run numbers. If needed, talk to a financial advisor - but be wary of talking to the same person who sold you the policy for advice, because there’s a lot of conflict of interest there, as they likely continue to make commissions from you holding on to the policy.
Review your insurance policy documents
The first thing you’ll want to do is read through your insurance policy documents so that you fully understand your situation. Not all policies are the same, so what you may have heard on a thread on social media or in a doctor’s lounge may or may not apply to you.
Determine the type of permanent life insurance policy
There are several types of permanent life insurance policies, including whole life insurance, universal life, variable life insurance, and other hybrid policies. Each has different pros and cons.
Look at the details of the policy, especially cancellation terms
You’ll need to look at the date the policy was issued, the number of years you need to pay a premium and how often, as well as the policies about the cash value of the plan, and what the value of the plan is if you surrender it.
If you recently bought the policy, there may be an option to cancel it for a full refund, like it never happened. This is usually within the first few weeks to month of the policy (the “free look” period). If this is the case, call the insurer immediately to cancel.
Ask for an ‘In-force’ illustration from the insurance company (NOT the person who sold you the policy)
Assuming you’re past the free look period, you’ll want to make sure it makes sense to drop the policy given where you are now. Even if it wasn’t a good idea to buy it when you did, it may be the right decision to hold the policy now.
What’s an in-force illustration of a whole life insurance policy?
An in-force illustration is a detailed look into the current status and forecast of the policy, and will cover where you currently stand and what you can expect going forward, taking into account:
The premiums already paid
The current cash value of the policy
The dividend or interest rates you are currently receiving
The current assumptions by which they are making projections
It will cover:
The current cash value of the policy and what you’d get if you surrendered the policy at that moment
Surrender charges or penalties if you gave up the policy now
Remaining premium schedule necessary to keep the policy active
Projected value of the cash value based on future growth, utilizing the outlined assumptions for dividends and interest
Death benefit projections over time, so you know what your beneficiaries can expect based on when the payout happens
Information about any loans against the policy if you’ve borrowed money against it
Why the in-force illustration is critical when determining whether to get rid of or surrender a life insurance policy
When deciding whether to keep or surrender a life insurance policy, you have to know what you’d stand to lose or gain, and compare it against what you would do with the cash value of the policy if you did get rid of the policy. Examples:
It may make sense to wait to surrender a policy if you can avoid certain penalties by keeping it in effect a little longer, and the in force illustration will map out what happens depending on when you surrender so you can strategize accordingly.
It will allow you to compare your ROI on your current investment to the return you’d earn elsewhere if you took the cash value of the policy instead of kept the policy going.
It will allow you to compare the current performance of the policy against what they said it would be at this time when you bought the policy, and see if any errors or fraudulent claims were made. If you were misled, you may have a claim that can be made (see below).
How exactly to ask for an in-force illustration
Remember, ask for this from the insurance company directly, not from the person that sold you the policy, as they may try to convince you not to drop the policy or skew the messaging because of conflict of interest. These illustrations can be done differently, so ideally ask for an in force illustration that shows both guaranteed and non-guaranteed values, as well as ask for projections that show the scenario where you cancel the policy right now and the scenario where you keep paying premiums.
Make sure that you document/record everyone that you’ve talked to and when, and what was discussed.
Decide what to do with the in-force illustration, and explore the options you have if you’ve been sold a permanent life insurance policy that you no longer want
This may be a long document, but once you receive it, you should review both the cash surrender value as well as the future projections for the policy. You’ll want to pay attention to when the surrender charges are no longer applicable, as well as how the cash value builds over time, and compare that to the alternative scenario where you have a term life insurance policy and invest the difference in premiums.
What are some situations where you may want to keep a whole life insurance policy even though you regret purchasing it?
Contrary to the echoes you may hear to cancel your permanent life insurance policy immediately, there are some common situations where you want to keep your policy now that you’ve bought it.
These include:
You’ve held the policy for a long time and the worst of the fees are behind you
Usually after you’ve held the policy for many years (think ~7-10), the front loaded fees of the policy have mostly been paid. At this point, the growth rate of your cash value may improve, and be a good conservative asset to hold in your portfolio for tax advantaged growth.
You don’t have a term life insurance policy and need one, but your health or age precludes you from getting a reasonable new policy
Importantly, if you do not have an existing term life insurance policy and are still at a point where you need life insurance, you’ll want to make sure you qualify for a term life insurance policy and secure that policy prior to dropping your existing permanent life insurance policy. Contact an insurance agent that works with physicians for help doing this. Avoid using the same person who sold you the existing permanent life insurance policy, as they may try to convince you to keep your current policy or otherwise offer biased advice or quotes. Once you have another quote in hand, you can discuss it with them if desired.
You’ve determined that you want lifetime coverage for life insurance instead of a term that will expire
There are certain life situations where lifetime coverage makes sense, often overlapping with the few reasons we often mention regarding when to consider permanent life insurance, including:
Having a dependent with special needs
Wanting to make a charitable donation
Using the life insurance plan for estate or business planning purposes, such as passing on a large estate in a tax advantaged way or to structure sales or inheritances
Alternatively, maybe your financial situation has changed and you’ve had a financially devastating event such as divorce or disability that will affect your future net worth, and/or you decide you want your beneficiaries to have the death benefit regardless of when you pass.
You have built up a very significant cash value that would have tax implications or large surrender charges
If you have built up a large cash value, you need to be mindful of the tax implications of cashing out the policy, where you may be taxed on gains. You’ll also want to be mindful of the surrender charges that could take away from that cash value if you are still in a period where those surrender charges are in effect. In these cases, you may be better off keeping or repurposing the policy to ensure you avoid losing more money.
The cash value is useful to you to borrow against
If you are in a situation where you need access to capital, the cash value of the policy may be great for borrowing against in a financially savvy way.
What are your options if you’ve been sold a permanent life insurance policy that you no longer want?
Cancel / surrender the policy
In this situation, you’ll request to surrender your policy, and you’ll receive the cash value minus any fees and surrender penalties. You may have tax implications, such as if the cash value exceeds the premiums paid. On the bright side, you won’t have to pay the premiums anymore. It’s generally pretty straightforward once you’ve asked them to terminate the policy.
Convert the policy to another life insurance policy or reduce the policy amount
Depending on the insurer and your plan, you may have options to convert your plan into something that fits your goals better or reduce the policy to make the premiums less burdensome. Some plans will let you reduce the death benefit or face value (thus reducing your premiums), convert to a new policy based on the premiums already paid so that you don’t owe any more premiums, or use the cash value to buy a term life insurance policy instead or use the cash value to offset future premiums owed. Walk through the options with them and see if these are more palatable to you.
You may also want to look into a 1035 exchange, which would allow you to roll the cash value into another financial product while minimizing the tax implications.
Keep it temporarily while you wait out the surrender charge period
Since surrender charges can be quite high, you’ll want to weigh the benefits of waiting out the surrender period. Surrender charges usually decline at about the 10 year mark, so if you’ve already had the policy for quite a few years, it may make sense to keep the policy a few more years when you run the numbers.
Sell the policy to a third party
Sometimes, there is a secondary market worth exploring. There are options to sell the policy to a third party, though this is a nuanced and regulated market which is beyond the scope of this article.
What if I still don’t know what to do?
If you need help evaluating your financial options or somebody to review the in-force illustration with you, talk to a financial advisor that is used to working with doctors (but again, ideally not a financial advisor who sold you this policy, if applicable). This advisor can help you:
Review the current options and projections
Help you decide whether to keep or cancel the policy
Walk you through any tax implications of surrendering your policy, if applicable
Talk you through other insurance options that may be more beneficial, like a term life insurance policy and how much life insurance to buy at this stage in your life
Do I have options if I believe I was misled or conned into buying this policy originally?
You might. If you strongly believe you were sold a policy inappropriately, there are a few options where you can consider filing a complaint.
Every state has an insurance commissioner, whom you can look up online and contact.
The insurance company itself likely has a compliance department that you could contact
You could reach out to a consumer protection attorney, who may be able to help you to recover some of your losses
There’s no guarantee that these will work as you likely signed a lot of paperwork when you signed the policies with vague language that protected against not meeting performance projections and that states you’ve been educated on the policy, but if you feel there’s a case for deceit, it could be worth exploring.
Conclusion
Life insurance is necessary for most physicians, but what type of life insurance you are sold matters. Many physicians find that they are in a position where they regret buying permanent life insurance policies such as whole life insurance, and wish to cancel it. However, before canceling it, it’s important to run the numbers and make an educated decision based on where you stand now.
Additional insurance resources for physicians
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