If I cancel a life insurance policy am I entitled to a refund?
A refund will depend on whether or not you've passed an insurers cooling off period. If the policy is cancelled:
- Within the cooling-off period. You're entitled to get a refund on the premiums you have paid to date (provided that you have not made a claim).
- Outside of the cooling off period. Premiums are generally not refundable, as life insurance does not have a savings or investment component.
Three steps to cancelling your life insurance
- Decide if you want to switch to a new policy or cancel outright
- Inform your life insurer in writing
- Follow extra steps from your insurer
What's a cooling off period?
Cooling off periods are grace periods that allow you to assess your insurance needs to make sure the policy you have at hand matches your circumstances and they often vary between providers, and are generally between 14 days up to 30 days.
Can I switch any life insurance policy?
If you want to switch to a new brand, make sure both insurers allow for policy transfers. Make sure you follow any additional terms.
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Five rules to consider when cancelling life insurance
- Refunds within the cooling off period. You can cancel your cover within the specified cooling-off period and the premiums you have paid will be fully refundable.
- Refunds after the cooling period. Premiums will not be refunded after the cooling period or if a claim has been made during the cooling-off period.
- Cancelling at anytime. You can cancel your policy cover at any time, however, the premiums you have paid to date will not be refundable.
- Refunds for policies in advance. If you pay your premiums in advance on a yearly basis, the coming year may be refundable minus any cancellation fees and stamp duties that are applicable.
- Request in writing. You will be required to provide your request to cancel your policy in writing.
Why do people cancel life insurance?
Many people do cancel their policies intentionally or due to non-payments. Some of the key reasons people cancel their policies include:
- They can no longer afford premiums that increase with age
- They find a competitor policy that offers a better rate
- Insurers redesign the definitions and exclusions which increases the price
- Advisers re-packaging a life insurance plan to increase commission.
Note: Lapse rate = the percentage of policies ceased due to cancellation or non-payment
Should I cancel my life insurance outright?
No one should ever feel like they are being weighed down by premium payments for insurance they do not need. Before cancelling, however, consider the following:
- You may need life insurance in the future. Remember that your needs and circumstances change over time. In later years it may be more difficult to get a new life insurance policy. Your age and current health conditions are two important factors that determine the level of premiums you pay. The older you are the higher your premiums will be, with an increased chance of paying additional loading for new medical conditions. The cost of life insurance increases dramatically after the age of 45. By age 60 your premiums will be about six times higher than when you were 40
- How much have you paid premiums already? Cancelling life insurance won't result in a premium refund. This could mean loosing thousands of dollars you have already invested into a policy.
- Would your dependents be financially secure without you? Consider how your family would support themselves if you were to suddenly pass away. Are your savings enough to cover mortgage repayments, daily living costs, education, health insurance, funeral costs and everything else?
What should I do instead of cancelling?
- Look at restructuring or switching. If financial strain is your main reason for closing a life insurance policy, consider reducing, restructuring or even switching policies instead. This can give you a more affordable policy without surrendering all cover and losing any benefits or discounts you may have accrued.
How to pay less by restructuring or switching your life insurance policy
As previously mentioned, you can reduce or restructure your life insurance policy if it no longer meets your needs. This method allows you to lower the premium rates you pay instead of cancelling your life insurance policy outright and leaving yourself unprotected.
Focus on the following factors when reviewing your policy.
- Sum insured. Reducing the amount of cover can help you save big, but before doing so consider having a full medical examination. If something potentially serious comes up then reducing the sum insured might be risky. Changing insurers would also be difficult as they might require further medical testing and may raise premiums even higher in response.
- Life cover policy, with trauma and/or TPD. If your existing life cover plan has trauma and/or TPD cover, look into dropping those altogether to reduce costs. Instead, consider income protection insurance to cover your earning capabilities in the event of an illness or injury, or simply rely on workers compensation and business insurance to cover you where it can.
- Additional features and benefits. You may want to assess if the features and benefits on your current policy really match your needs. You may be able to trim back on expensive extras to save money. Consider keeping the additional features that can provide you with the most benefit and cutting the rest
- Indexation rate. Most life insurance premiums will be indexed for inflation at a minimum rate of 5% a year, but you can request a lower indexation rate from your insurer. This can lower premiums, but means your coverage will not be keeping up with inflation and may be worth less if you make a claim.
- Waiting period. If you have income protection cover, consider a longer waiting period. Extending your waiting period from 30 days to 90 days can reduce your premiums by half, but in this case means the injury or illness has to leave you unable to work for ninety days instead of just thirty before you can receive any benefits. This is a good option if you have other benefits from your employer such as annual leave, long service leave or sick leave to fall back on.
- Benefit period. Decreasing your maximum benefit period can also lower premiums significantly. This is the maximum amount of time a policy will pay out in the event of disablement or loss of income.
Another alternative: Switch to a cheaper life insurance through superannuation rollover
Another way to save money without losing protection altogether, is to consider life insurance cover inside your superannuation fund. Life insurance policies through superannuation are more affordable as they are purchased in bulk by your superannuation funds and offered to you at a reduced rate. You may already have cover automatically included with your superannuation through your employer’s nominated fund.
However, bear in mind that these are usually more basic policies with limited cover and some conditions. These include:
- Only basic cover with limited features and benefits
- Lower limits and a reduced level of cover
- More complicated tax treatments
- Complex claims process
What is superannuation rollover?
Superannuation rollover allows you to transfer the funds in your existing superannuation account to a new account held by an insurance provider, which can then be used to pay for your life insurance premiums and keep them affordable. Linking your life insurance and superannuation funds is one of the best ways to change your policy without losing the money invested in it. However, be aware that you cannot get you the most comprehensive or flexible policies.