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Thinking about canceling life insurance?

First, consider the pitfalls & your other options

When you bought life insurance, you set up yourself and your loved ones with financial protection. Not only does it provide your beneficiaries with a payout upon your death that can replace your income and help pay expenses, but it also may be a source of tax-deferred savings for you.

These are benefits that often sit silently in the background until the moment you need them. So, if you're thinking about canceling life insurance, you may want to consider all that you might be losing without it.

Let's look closer at some of the common pitfalls of canceling life insurance—such as future coverage issues and missing out on potential investment growth—as well as some other actions besides canceling to think about.

The bottom line:

As you think about the possibility of canceling your life insurance, review the benefits you have and weigh their value.
Your family may not have the protection of a financial safety net if you were to pass away.
You'll have to go through medical underwriting again if you re-apply, and you may face more approval hurdles and higher rates.
You may have a taxable event if your policy's cash surrender value exceeds your cost basis, and you'll miss out on future tax-deferred growth.

Why maintaining life insurance is important

There are two key advantages to having continuous coverage with your life insurance: ongoing financial security for your loved ones and maintaining lower premiums and insurability.

With a life insurance contract in force, your dependents have financial support they can count on if something happens to you. It's money they can use to cover your funeral costs, offset mortgage payments, and continue building the future you planned with them, such as paying for college. Canceling your life insurance creates a gap where the people who depend on you no longer have this kind of financial safety net.

The other upside to keeping your existing life insurance is that you've already proved your insurability. If you cancel your life insurance and decide later that you want it again, you'll have to reapply and go through medical underwriting again. That may not seem like a big deal, but the older you get, the more likely you are to develop health problems. Insurers' approval and rate calculation factor in that your risk of death goes up with age. So if you are approved, your premium likely will be higher than what you have now.

Reasons besides coverage to keep your life insurance

Life insurance can do more than provide protection for your loved ones. It can be a source of tax-deferred savings for you. Cash-value life insurance has a built-in savings component that allows you to accumulate money that you can tap for whatever you need, including unexpected expenses, personal financial goals and supplementing retirement income, as long as premiums are paid (for a Whole Life contract) and the contract retains its value.

Keep these advantages in mind:

  • Your cash balance may grow at a fixed rate, a market rate of interest, or you can invest it to earn returns that are linked to the market.
  • Because it is tax-deferred, you won't have to pay taxes on your growth until you withdraw the money.
  • Additionally, you may be able to borrow from your cash balance without paying any taxes at all.

If you cancel your life insurance, your cash-value balance will be distributed to you, but only after any surrender charges and other penalties detailed in your contract are deducted. Any growth in the cash value will be included in your taxable income for the year in which you cancel your policy. In addition to losing the tax-deferral advantages, you'll miss out on your cash value's potential investment growth.

3 alternatives to canceling your life insurance

If you have coverage that you think you don't need and are wondering if you should cancel your life insurance, realize that you have options that don't involve walking away from what you've put into it. You may be able to preserve the insurance benefits you want while lowering your premium.

1. Reduce your coverage

Decreasing the amount of your life insurance death benefit is a straightforward way to get a lower premium while keeping some of your coverage in force. You may incur a one-time charge to decrease your death benefit, depending on the contract. The advantage of this is you still have some coverage. However, if you decide you need more coverage in the future, you will have to undergo underwriting to determine approval and rating of a new contract. Also, if you have a cash-value component, it will remain in place and stay tax-deferred.

2. Reduce your premiums

Some types of life insurance already have the flexibility of adjustable premiums built in, such as universal life insurance and variable universal life insurance. Whole Life insurance may have dividends from current or previous years that can be used to pay for contract premiums. Before reducing your premiums or using dividends to pay for premiums, you should consult with your financial advisor to understand the impact this will have on the future performance of your contract.

3. Convert or exchange your contract

If you have term coverage, you may be able to convert it to permanent life insurance. Doing so could provide some long-term advantages:

  • Retain your coverage for life
  • Build a savings balance with cash value
  • Secure a premium rate that will last

If you already have permanent insurance, you can look into exchanging it for another type that better fits your needs. For example, you may have a whole life contract but need the flexibility of a universal life policy. Replacing a permanent life policy with a different type of permanent policy may be eligible for a 1035 exchange, which allows you to replace coverage without a taxable event. However, replacement of an in-force policy also will require underwriting.

Getting expert life insurance advice can make a difference

Canceling a life insurance contract, reducing your death benefit, reducing your premiums, or converting your policy are all decisions that can have lasting effects for both you and your family. If you know the full extent of your options, you're better equipped to select the one that best fits your needs.

A qualified financial advisor not only knows all the ins and outs of the various types of life insurance contracts, but also can assess your individual circumstances and goals to give you personalized guidance. Without help, it can be difficult to know how much life insurance you need or whether to choose term vs. permanent. They can also show you how life insurance can help you build wealth. They have the advantage of serving many people like you who have the same questions you have and can tailor their advice to what works for you.

It's a good idea to talk through all your options for reducing your premiums and converting or exchanging your life insurance contract. A local Thrivent financial advisor can look at your individual situation and help you make an informed decision.

Investing involves risk, including the possible loss of principal. The prospectus and summary prospectuses of the variable universal life contract and underlying investment options contain information on investment objectives, risks, charges and expenses, which investors should read carefully and consider before investing. Available at 

Loans and surrenders will decrease the death proceeds and the cash surrender value and may cause the contract to terminate without value. Loans and surrenders may generate an income tax liability. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loans and surrenders may cause a contract to lapse or terminate without value. Loaned values may accumulate at a lower rate than unloaned values. Contractual changes may apply.

Insurance products, securities and investment advisory services are provided by appropriately appointed and licensed financial advisors and professionals. Only individuals who are financial advisors are credentialed to provide investment advisory services. Visit or FINRA’s BrokerCheck for more information about our financial advisors.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance may be solicited.

Guarantees based on the financial strength and claims paying ability of Thrivent.

This contract has exclusions, limitations and terms under which the benefits may be reduced, or the contract may be discontinued. For costs and complete details of coverage, contact your licensed insurance agent/producer.