Can You Cancel a Term Insurance Policy Midway?

Understanding Term Insurance Cancellation

Term insurance policies are issued for a given time period and prescribed premium paying terms. These two periods can be similar or different.

For example, here is a quotation received by a 27-year-old female working in a bank in Delhi:

Source of Information: HDFC Life

The above table describes how an individual can choose premium-paying options for the assured sum. If she goes for a 10-year premium paying term, she will need to pay ₹26216 per year for ten years and be covered for 40 years. In case of her unfortunate death, her nominee will receive a sum of ₹1 crore.

Term insurance cancellation happens if, after 5 years, she decides not to pay any more premiums and cancels the insurance. This involves formally informing the insurer about your decision, following the stipulated process, and potentially receiving a refund or incurring penalties depending on the policy terms.

Since term insurance is typically risk-cover-only, there is no concept of surrender value here. There can be different reasons for cancellation, such as:

1. Financial constraints and inability to pay premiums

2. Not needing the coverage anymore

3. When all necessary obligations (for which the coverage was meant) have been taken care of

4. If the policyholder gets better coverage in a different policy

5. When term insurance does not align with the long-term financial plans of an individual.

Regulatory Guidelines on Policy Cancellation in India

The IRDAI (Insurance Regulatory and Development Authority of India) plays a critical role in safeguarding the interests of all policyholders in India. Per the guidelines, a policyholder can cancel a term insurance policy at any time by informing the insurance company in writing. IRDAI protects policyholders against any penalties for cancellations.

In case there is any unused amount for the period, it is typically returned to the policyholder. Continuing with the example, the policyholder pays the sixth installment at the beginning of year six. After a couple of months, she decides to cancel the policy. As the premium is paid in advance, the unused amount for 10 months is typically returned to the policyholder (the calculations and refund policies differ as per terms and conditions).

Refund Policies and Potential Penalties

Refund policies and potential penalties on cancellation often depend on the insurance policy’s terms and conditions. Here are some of the common points:

1. Calculating any refunds (depending on the unused portion of the paid premium) is decided in advance and provided in the policy document. If you cannot locate it, it is advisable to contact your insurer.

2. There might be penalties for administrative fees, applicable taxes, and charges for any additional benefits (riders) availed during the policy tenure.

3. The refund amount is affected by different factors, such as total time elapsed, premium paid, claims made, and specific policy terms and conditions.

4. Insurance providers offer a free look period to all policyholders. This period is typically between 15 to 30 days when a policyholder can carefully evaluate the terms and conditions. If anything is not to their liking, they can cancel the policy. Refunds during this period are subject to deductions for medical examination costs, stamp duty charges, and the risk premium for coverage during the elapsed days.

Steps to Cancel a Term Insurance Policy

You can take the following steps to cancel your term insurance policy midway:

1. Carefully evaluate your policy and understand the cancellation process, the refund procedure, and applicable penalties.

2. Contact your insurance provider and give the request in writing.

3. Submit all the necessary documents along with the cancellation request, such as identity proof, policy document, and proof of premium payment (if applicable).

4. Follow up for proof of cancellation and keep a record of the communications.

Alternatives to Cancellation

As we had suggested earlier, canceling your policy should be the last option you should consider. Besides cancellation, you can convert it to a different plan, such as whole life or endowment, if offered by the insurer. Alternatively, you may reduce the sum assured or modify the policy terms to lower premiums.

These options can preserve your coverage while aligning with your financial needs.

Summing up

Canceling a term insurance policy midway is not the best personal financial decision you can make. However, even if you wish to pursue cancellation after considering all the alternatives, it is important to study your policy’s terms and conditions on cancellation, refunds, and penalties. You must remember that once you cancel a policy midway, you are jeopardizing your family’s financial future.

FAQs

Can I cancel my term insurance policy at any time?

Yes, you can cancel your term insurance policy at any time by informing your insurer in writing, though refunds and penalties depend on the policy terms.

Do I get a refund if I cancel my term insurance policy?

A refund may be issued for the unused portion of the premium, depending on the insurer’s terms and conditions and any applicable deductions.

What happens if I stop paying premiums for my term insurance?

If you stop paying premiums, the policy will lapse, and you will lose the coverage provided by the insurance.

Are there alternatives to canceling a term insurance policy?

Yes, you may explore options like reducing the sum assured, modifying the policy terms, or converting it to another type of policy if allowed by your insurer.