Here's What Happens When You Cancel Your Life Insurance Policy

The purpose of paying for life insurance is to protect your loved ones from financial distress in the event of your passing. But there may come a point in time when you decide that you no longer need life insurance -- and you no longer wish to be paying the premiums it costs to keep your policy active.

Let's say you have a $500,000 life insurance policy in place, but a wealthy family member of yours passes away and leaves you with a $500,000 inheritance. You may decide to invest that money or put it into a savings account you pledge not to touch so it doesn't run out, at which point it could conceivably take the place of your life insurance policy.

Or, other circumstances might change that make it so you no longer want or feel you need life insurance. In many cases, canceling your policy is easy. You simply reach out to your life insurance company and let them know you no longer want your coverage.

Even if you don't do that, if you stop making your payments, your coverage will lapse at some point. Life insurance companies aren't in the business of giving people coverage for free.

In some cases, canceling a life insurance policy will mean getting a cash payout from your insurance company. But that's not always what happens.

When you are and aren't entitled to a payday

Term life insurance does not accumulate any sort of cash value. If you buy a 20-year, $500,000 life insurance policy and don't pass away during that time, you won't get any money from your insurer after those two decades. Similarly, if you cancel a term life insurance policy at any point, you won't be entitled to any sort of payday.

But things may be different if you have whole life insurance. Whole life insurance policies do accumulate a cash value over time. So depending on when you cancel your policy, you may be entitled to take that cash value with you.

Should you cancel your life insurance policy?

The decision to cancel a life insurance policy is a big one, so it's important to think carefully before going this route. If you're looking to cancel because you're having a hard time keeping up with the cost of your premiums, you may want to consider replacing your current policy with a less expensive one. This could mean going from whole life insurance to term life insurance, which can be a lot cheaper.

In fact, Forbes says that the cost of a $500,000 life insurance policy for a 30-year-old male might be $4,323 a year for whole life insurance versus $232 a year for a 20-year term policy. That's a huge difference.

You might also consider buying a policy with a smaller benefit. For example, a $500,000 life insurance policy is apt to cost you less than a $1 million policy will. And while that won't give your loved ones as much financial protection, having some amount of life insurance is better than having none.