What are your options when cancelling life insurance?

When and why do people resort to early termination of life insurance?

Cancellation of life insurance is not a rash decision; it is usually a step that people take only after careful consideration. Sometimes their financial situation changes, for example when they lose their job, start a business or simply need cash. Other times they find that their life insurance policy does not deliver what their adviser originally promised. It’s also very common for people to take out life insurance for the tax relief, but then find that it doesn’t pay off – especially with investment contracts.

So there are a number of reasons for early termination of life insurance – from personal to financial to quite pragmatic. What most people don’t realise, however, is that terminating life insurance isn’t just about signing and sending a letter. Each step has its own rules and consequences.

How and when do I proceed with the termination of life insurance?

Termination of life insurance is governed by the Civil Code. The insurance contract is a legally binding relationship between the insurance company and the client and, like any contract, the insurance contract has clear rules for termination. In addition, the rules of the Insurance Act, which determines the obligations of insurance companies and consumer protection, apply.

In practice, life insurance can be terminated:

• within 2 months of the conclusion of the contract,
• on the anniversary date with six weeks’ notice,
• at any time by agreement of both parties, in which case they must also agree on how to settle the money between them – i.e. who gets what or returns what, and the exact date on which the insurance is to end,
• or by cancellation in the event of misrepresentation in the negotiation of the contract.

The legal framework also says that cancellation of life insurance must be made in writing. So it is not enough to send an email or call a helpline. If the insurance company refuses to cancel the contract for any reason, don’t be afraid to ask a lawyer for help – the law is on your side in this case.

There are several ways to cancel a life insurance policy. The first and most common option is cancellation at the end of the policy term, called the anniversary date. You must give notice to the insurer at least 6 weeks before this date. If you don’t make it in time, the contract is automatically extended.

The other option is to give notice within two months of the contract – here there is no surrender charge or penalty to deal with, a simple notice is enough and the insurer will terminate the contract. Once the notice is served, the insurance will expire after 8 days.

The other option is an agreement – if you reach an agreement with the insurance company, the contract can be cancelled at any time. But beware, the insurance company is not obliged to agree to the agreement.

The last and legally strongest option is to cancel the contract. If the insurer or broker has withheld important information or given you false information, you can challenge the contract as invalid. This is a task for a lawyer and we will be happy to help you.

What will cancelling life insurance cost you?

Early termination of life insurance can have unpleasant financial consequences. If you’ve claimed tax deductions in the past, you’ll be facing back taxes for the last 10 years. People often forget about this and then come up with an unexpected catch-up at the annual return or after an audit from the Inland Revenue.

Another risk is the various fees, such as early cancellation fees or cancellation fees associated with the investment component of the policy. If you have recently taken out a policy, the surrender charge (the amount you get back) may be lower than the premium you have paid so far. This is because the insurance company will often charge you for arrangement fees, commissions and other costs.

Buyout: How much will you get back?

The surrender value is the amount the insurance company pays you when you cancel your life insurance early. Unfortunately, people are often disappointed because they expect to get back what they paid, but the reality is often different.

The amount of the surrender charge depends on how long the policy has been running, how much you have paid in premiums and what costs the insurance company has charged. If you have investment life insurance, the performance of the investment component also matters. With term life insurance, no surrender charge is paid at all because there is no savings component.

The surrender charge can be (especially in the early years of the contract) literally ridiculously low. In practice, it is not uncommon for the client to get back after two years , for example, only 10% of what he paid. That is why we recommend that you find out the exact amount of the surrender fee before terminating the contract and, if necessary, reformulate the contract so that you do not incur any damage.

How do I cancel life insurance taken out online or through an intermediary?

Have you taken out a life insurance policy online? Then slightly different rules apply to you than for contracts signed in person. If the contract was agreed remotely (e.g. via the internet, email, telephone or off-premises), you have the right to cancel the contract within 30 days without giving any reason, according to the Civil Code. Simply send a written withdrawal and the contract is deemed void from the outset.

But beware, the time limit starts from the date of delivery of the insurance conditions, not from the date of agreement. If, for example, your adviser slipped the life insurance policy between the doors and delivered the documents later, even a notice of termination after 14 days may be valid because the time limit has not yet started to run.

In addition, another risk lurks with a notice arranged through an intermediary – incorrect or incomplete advice. Many people find out years later that the adviser has sold them an unsuitable product, often for commission. If it turns out that the intermediary has withheld important information or failed to act in accordance with a duty of care, the contract may be void. In such cases, we again recommend that you contact a lawyer.

What is needed for a valid notice?

A life insurance termination is not complicated, but it must have the correct form and content. It is not enough to tell the insurance company that you are cancelling the contract, and certainly not over the phone. The notice must be in writing, contain specific identification of the contract (contract number, policyholder’s name and social security number) and a clear statement of intent to terminate the contract. Ideally including the date on which the termination is directed.

Often the insurer’s terms and conditions themselves also regulate the notice requirements. Some institutions also accept data mail or email with an electronic signature, but in general, registered letter with delivery or personal delivery to a branch with acknowledgement of receipt is safest.

What to look out for when terminating life insurance

Terminating a life insurance policy can be a trap, in several ways. Let’s start with the psychology: many people terminate a policy out of frustration without calculating what it will cost them. So the first rule of thumb is – always get the surrender value calculated, find out about the charges and see if you are at risk of back taxation.

Another common mistake is to cancel life insurance without a refund. If your current policy does not suit you, it may be better to redraft it or replace it with another rather than cancel it altogether. This is because you may not be insured in the interim, and if something happens to you (such as an accident or illness), you won’t get a penny.

Also, beware of automatic renewal. If you give your notice late, your contract can continue for up to a whole year.

Summary

Canceling life insurance isn’t just a matter of signing and sending a notice – each step has legal and financial consequences. When and how you can cancel: within two months of signing the contract, on the anniversary date with notice, by agreement with the insurer or by cancellation in the event of misleading behaviour. The key is that the notice must be in writing and contain precise details, including the contract number and the date of termination. However, early termination of a policy often means retrospective tax relief, cancellation charges or a low surrender charge, which can be ridiculously low, especially in the early years of the contract. Specific rules apply to contracts arranged online or through an intermediary, where the right to cancel within 30 days is often exercised. If you cancel your policy prematurely, you risk being left uninsured and losing money in the process. If you’re unsure, it’s always worth consulting a professional – sometimes it can be more advantageous to adjust the contract than cancel it altogether.