How to cancel life insurance in Canada

To cancel a life insurance policy in Canada, the policy owner sends the insurer a signed written request, usually on the insurer’s own form. If you cancel a new individual policy in writing within 10 days of receiving it, an industry guideline means you generally get your premiums back. After that, a term policy simply ends with nothing paid out, and a permanent policy pays its cash surrender value, if it has one, part of which may be taxable. The steps are simple. The decision is the part worth slowing down for, because a cancelled policy generally cannot be put back, and replacing it later means applying at your current age and health.

Before you cancel, check three things

1. Are you replacing it? Then do not cancel until the new policy is issued, paid for and in force. Approval is not coverage, and the gap between them is where families get hurt; our guide to why you should never cancel the old policy first walks through the safe sequence.
2. Does it have cash value? Whole life and universal life policies offer alternatives to cancelling outright, covered below, that can keep some coverage or cash without ending the contract.
3. Is it mortgage insurance from your bank? Creditor insurance has its own cancellation rules, also covered below.

How to cancel, step by step

1. Confirm who can sign. Only the policy owner can cancel, which is not always the person whose life is insured. If you named an irrevocable beneficiary, that person must consent. If the policy is assigned to a lender as collateral, the lender must sign, and so must every co-owner. In Quebec, naming a married or civil union spouse as beneficiary (other than in a will) makes the designation irrevocable unless the designation says otherwise, so a spouse’s consent is often needed there.
2. Get the insurer’s form. Insurers generally ask for a signed written request, usually on their own cancellation or surrender form; a phone call alone is usually not enough.
3. Choose the effective date. Insurers generally cancel when they receive or process the signed request. Some let you choose a later date, such as the next policy anniversary. On a participating policy, cancelling at the next anniversary can mean receiving that year’s dividend.
4. Get written confirmation of the date coverage ends, the amount of any payment, and that premium withdrawals will stop.

Stopping a pre-authorized debit with your bank does not cancel the policy; the payment agreement and the insurance contract are separate. Cancel the policy with the insurer first.

Why not just stop paying?

You can. If premiums stop, the policy stays in force through a grace period of at least 30 days set by provincial law, and some contracts allow 31. After that, it lapses.

A lapse is actually more forgiving than a cancellation. Provincial insurance law lets you reinstate a lapsed policy within two years by paying the overdue premiums with interest and providing evidence of good health, unless the cash value has been paid out. In Ontario, British Columbia, Alberta and Manitoba you can also reinstate within a further 30 days after the grace period simply by paying the overdue premium. A policy you cancel on request has no such path. The trade-off is that a lapse is less tidy: the policy remains in force during the grace period, and on a permanent policy the contract may use the cash value to keep paying premiums before it lapses. Letting a permanent policy with cash value lapse is also a taxable disposition, much like a surrender, unless it is reinstated within 60 days after the end of that year. If you are certain, a written request is cleaner. If you are not, a lapse keeps the door open briefly.

What you get back

Within the free look period. Members of the Canadian Life and Health Insurance Association are expected to follow an industry guideline that lets you cancel a new individual policy in writing within 10 days of receiving it, and no later than 60 days after it was issued, for a full refund of premiums. The policy is treated as if it never existed. If the policy was mailed, the 10 days run from no earlier than five days after mailing. Group insurance, creditor insurance and policies over $2 million are excluded.

Term life after the free look. A term policy has no cash value, so cancelling pays nothing out. Whether any part of a premium you have already paid is refunded depends on the contract and how you pay; ask the insurer before choosing the effective date.

Permanent life after the free look. Whole life and universal life usually pay their cash surrender value: the cash value, plus any dividends left on deposit, less any surrender charges, outstanding policy loans with interest, and premiums owing. Term 100 and some universal life policies build little or none. In the early years it is usually far less than the premiums paid, which our guide to whole life insurance costs explains.

The tax on cash value

Surrendering a permanent policy is a disposition under the Income Tax Act. Any amount you receive above the policy’s adjusted cost basis is a taxable policy gain, added to your income and reported on a T5 slip. The adjusted cost basis starts as the premiums you paid but is reduced over time by the net cost of pure insurance, a figure set by tax regulations, and by any earlier withdrawals or loans, so it is often well below what you put in. A partial surrender is taxed proportionally, and a policy loan is taxable to the extent it exceeds the adjusted cost basis. Our guide to whether life insurance is taxable in Canada covers the rest.

Alternatives to cancelling a permanent policy

If the problem is the premium rather than the coverage, ask the insurer which of these your contract allows:

• Use dividends to pay premiums, on a participating policy with enough accumulated dividends.
• Reduced paid-up insurance: stop paying and keep a smaller, fully paid policy for life.
• A partial surrender or policy loan to free up cash while keeping coverage, bearing in mind the tax rules above.
• Reduce the coverage amount to lower the premium.

For a term policy, ask whether the insurer will reduce the amount, usually subject to a minimum, and if your health has changed, a conversion privilege may be worth more than anything you could buy new.

Mortgage and creditor insurance from your bank

Creditor insurance sold with a mortgage or loan follows its own industry guideline. You can cancel it at any time, and if you cancel within a review period of at least 20 days you get a full refund. Some banks set that period at 30 days in their own contracts. After it ends, you are generally refunded only the unused part of any premium already charged, as described in your certificate. For insurance added to a loan from a federally regulated bank, federal consumer protection rules require a proportional refund of unused charges. In Quebec, insurance sold together with another contract, such as a loan, can also be rescinded within 10 days of signing by notice sent by registered mail.

Before cancelling mortgage insurance, make sure replacement coverage is in force. Mortgage insurance can cost more than individual term life for the same amount, and its benefit shrinks as you pay down the mortgage, but it is still coverage, and the same never-cancel-first rule applies.

If you are replacing the policy

When an advisor arranges a new policy to replace an existing one, provincial rules in Ontario, Quebec and elsewhere require a replacement disclosure. In Ontario the agent completes a replacement declaration with a written explanation of the advantages and disadvantages, and sends a copy to the old insurer. In Quebec the agent must give you a Notice of Replacement. Read it: it sets out the advantages and disadvantages of replacing, so you can judge whether the new policy is genuinely better.

A new policy also restarts the clocks. The insurer can contest a new policy for misrepresentation for two years under provincial law, and for fraud at any time, and most policies exclude suicide in the first two years. That is one more reason to keep the old policy in force until the new one is settled.

Can you sell a policy instead?

Usually not. Every province except Quebec, including Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador, prohibits trading in life insurance policies, so selling a policy to an investor for more than its cash value is generally not an option. Quebec is the exception.

Frequently asked questions

How do I cancel my life insurance?

Send the insurer a signed written request, usually on its own form. The policy owner signs, along with any irrevocable beneficiary, assignee and co-owner. Ask for written confirmation of the end date.

Can I get my money back?

If you cancel a new policy in writing within 10 days of receiving it, usually yes, all of it. After that, term policies pay nothing, and permanent policies pay their cash surrender value, if any, which is usually small in the early years.

Is the cash value taxable?

The part above the adjusted cost basis is a taxable policy gain, reported on a T5 slip.

Does stopping payments cancel the policy?

Eventually: it lapses after a grace period of at least 30 days. A lapsed policy can usually be reinstated within two years, typically with evidence of good health, which a cancelled one generally cannot. Stopping the bank debit alone does not cancel it.

Can I cancel mortgage insurance from my bank?

Yes, at any time. A full refund applies within a review period of at least 20 days, or longer if your lender’s contract allows. After that, generally only the unused portion of premiums already charged is refunded.

What to do next

If you are cancelling because the premium no longer fits or you have found something better, talk it through first. A licensed advisor can check whether a lower amount, a conversion or a replacement policy serves you better, and make sure nothing lapses before the new coverage is in force.