Cancelling a life insurance policy: A guide with a template and expert tips to maximise your payout
16.05.25
4
Minutes
Katrin Straub
Managing Director at nextsure
Are you considering cancelling your life insurance? This step should be carefully considered, as it is often associated with financial losses. We’ll show you how to proceed and what options you have to make the best of your situation.
The topic in brief and concise terms
Cancelling a life insurance policy often leads to financial losses, as only the surrender value is paid out, which is usually below the contributions paid in.
Alternatives such as sale, premium-free policy or revocation (especially for contracts from 1994–2007) may be financially more advantageous than cancellation.
A cancellation may still be possible even years later if the information was incorrect, and can lead to the repayment of all contributions plus interest.
Cancelling life insurance: Understanding the basics
Cancelling a life insurance policy ends your contract prematurely. You will then be paid the so-called surrender value. This value can, especially in the first few years, be significantly lower than the total of the contributions you have paid in. This is because initial and administrative costs, as well as a possible cancellation deduction, are subtracted. Many policyholders underestimate the amount of these deductions, which are often not offset until after five to ten years of the policy term. A cancellation should therefore never be the first option without first considering alternatives. As a rule, the notice period is one to three months to the end of the current insurance period. It is important to check the exact terms in your policy or ask your insurer. Also consider whether you should consider changes to old contracts.
The surrender value: What you really get paid out
The surrender value is the amount your life insurance is worth at the time of cancellation. Its calculation is complex and depends on several factors. These include the amount of your contributions paid in, the policy term, the profits generated, as well as the costs and surrender deductions already mentioned. Insurers are legally obliged to inform you of the current surrender value in the annual policy statement. For unit-linked life insurance policies, the surrender value corresponds to the current value of the fund units. It is important to know that the surrender value is often very low in the first years of the contract or may even be nil. Before you expect to cancel your life insurance and get money back, you should check this value carefully. You will find the exact calculation method in the General Terms and Conditions of your policy.
Alternatives to cancellation: Better options for your money
Before you cancel your life insurance policy and possibly accept financial losses, you should consider various alternatives. These are often more advantageous. One option is to make your policy paid-up. This means you no longer pay any further premiums, but the contract remains in force and the capital you have built up continues to earn interest, even though the later payout is lower. Another possibility is to sell your life insurance policy on the secondary market. In some circumstances, you may achieve a purchase price that is three to four per cent above the surrender value. Taking out a loan against the policy is an option if you need money at short notice; your insurance cover remains in place, but you incur loan interest. Reviewing a cancellation can be particularly lucrative if your contract contains errors in the cancellation notice. Here is an overview of the most common alternatives:
Paid-up policy: No further payments; the contract continues with a reduced value.
Sale: Potentially higher proceeds than the surrender value, but a market for policies from around a value of 5,000 euros.
Policy loan: Short-term liquidity, insurance cover remains in place, interest costs apply.
Cancellation: If the notice is faulty, often possible even after years, repayment of all premiums plus interest.
Partial surrender: Not always possible, payout of part of the surrender value, contract continues.
The decision depends heavily on your individual situation and the contract details. Making a whole-of-life insurance policy paid-up is often a worthwhile alternative.
Withdrawal: An often overlooked opportunity to get more money
Revoking your life insurance policy can be financially far more attractive than cancelling it. This applies in particular to contracts concluded between 29 July 1994 and 31 December 2007. Many of these policies contain incorrect cancellation information, which can give rise to an “everlasting right of objection”. If revocation is successful, the contract is treated as if it had never existed. You then receive not only your paid-in premiums back, but also the interest earned by the insurer and all fees. This can result in a payout of up to 150 per cent of the contributions paid in. Even if your contract has already been cancelled or has expired, revocation may still be possible. It is advisable to have your contract checked by experts free of charge before submitting a cancellation. Also consider the tax aspects if you cancel a private pension insurance policy and pay tax.
Cancelling life insurance template: How to word your letter
If, after carefully considering all your options, you have decided to cancel your life insurance policy, you will need a formal cancellation letter. This should definitely be sent in writing and by registered post, so that you have proof of receipt. A simple cancellation letter should contain at least the following details:
Your full name and address.
Name and address of the insurance company.
The policy number of your life insurance.
The current date.
A clear statement that you are cancelling the contract at the earliest possible date. (e.g. „I hereby cancel my life insurance policy with contract number [] in due time at the earliest possible date.“)
A request for confirmation of cancellation and notification of the payout amount and payout date.
Your bank details for the payment of the surrender value.
Your handwritten signature.
Please make sure you observe the notice period, which is usually one to three months before the end of the insurance period. A template can be helpful, but always adapt it to your individual situation. A calculator can be helpful for calculating the tax on life insurance.
Expert tips: Legal aspects and recent rulings
The German Insurance Contract Act (VVG) forms the legal basis for cancelling life insurance policies. Section 169 VVG, for example, governs entitlement to the surrender value. For contracts concluded under the policy model (entered into between 1994 and 2007), the Federal Court of Justice (BGH) has strengthened policyholders’ rights in several rulings (e.g. case no. IV ZR 76/11), particularly with regard to the right to object in the event of incorrect instructions. The Court of Justice of the European Union (CJEU) has also confirmed this unlimited right to object. Our expert tip: Be sure to have contracts from this period checked for the possibility of revocation, as this can often yield several thousand euros more than a cancellation. After the occurrence of an insured event (claim), both the policyholder and the insurer can cancel the contract within one month of the conclusion of negotiations on compensation (Section 92 VVG). Also find out how long a life insurance policy runs.
The tax treatment of the surrender value depends on the date the contract was concluded. For contracts concluded before 1 January 2005 (old contracts), the payout is tax-free under certain conditions. These usually include a minimum term of twelve years and a premium payment period of at least five years. For contracts concluded on or after 1 January 2005 (new contracts), the return – that is, the difference between the payout and the contributions paid in – is generally taxable. If the contract ran for at least twelve years and the payout is made after the age of 62, only half of the return has to be taxed at the personal income tax rate. Otherwise, the full return is subject to a flat-rate withholding tax of 25 per cent plus the solidarity surcharge and, where applicable, church tax. Since cancellation often does not result in any real return, but rather a loss, no tax or only a small amount of tax is due in many cases. It is best to clarify your individual tax situation with a tax adviser. This is also relevant if you are considering converting a term life insurance policy.
Cancelling term life insurance: special aspects
Cancelling a term life insurance policy differs fundamentally from cancelling an endowment life insurance policy. As term life insurance provides pure death cover and does not build up capital, there is no surrender value if you cancel. You therefore receive no money back. The insurance cover ends when you cancel, and your dependants are no longer protected in the event of death. As a rule, cancellation is possible at any time until the end of the current insurance period. You can find the exact notice periods in your policy. Think carefully about whether you really no longer need the cover for your dependants before you cancel a funeral expenses insurance policy or terminate a term policy. Sometimes adjusting the beneficiary designation for the life insurance policy can also be an option instead of cancelling directly.
Conclusion: Weigh your options carefully
The decision to cancel a life insurance policy should never be made lightly. The financial disadvantages of a low surrender value can be significant, and policyholders often lose part of the contributions they have paid in. It is essential to first examine all alternatives such as sale, premium-free status or, in particular, revocation. A revocation can, especially for contracts between 1994 and 2007, lead to a significantly higher payout. Only use a “life insurance cancellation template” once you have informed yourself thoroughly and sought advice. A careful review and, if necessary, professional advice can help you save or additionally receive several thousand euros. Also find out about the different types of life insurance to better assess your situation. We at nextsure are happy to help you find the best solution for your individual situation.
Request an individual risk analysis now: Have your insurance situation checked free of charge and receive concrete optimisation suggestions.
More useful links
Destatis offers a press release on the “Figure of the Week” relating to life insurance policies.
Destatis explains the term “insurance credit balance” in the glossary in the context of insurance.
The Federal Ministry of Finance provides information on the income tax treatment of life insurance policies.
Under Gesetze im Internet, you can find the full text of the Insurance Contract Act (VVG 2008), which forms the legal basis for life insurance policies.
The Deutsche Bundesbank publishes statistics on insurance companies and their development.
FAQ
How do I properly cancel my life insurance policy?
Submit a written cancellation letter, including your insurance policy number, your request to cancel at the earliest possible date and your signature, to your insurance company by registered post. Please note the notice period.
Do I get my money back if I cancel a term life insurance policy?
No, with term life insurance there is no surrender value, as it only covers the event of death and does not build up any capital. Cancelling it terminates the insurance cover.
Is revoking my life insurance policy better than cancelling it?
Often, yes. A cancellation can, especially for contracts with an incorrect cancellation policy (often concluded between 1994 and 2007), lead to a significantly higher payout, as you can receive back all contributions plus interest.
What costs are incurred when cancelling a life insurance policy?
When the contract is cancelled, acquisition and administration costs, as well as often a cancellation deduction, are deducted from the savings capital. This means that the surrender value is usually lower than the sum of the payments made.
When should I not cancel my life insurance?
You should not cancel before you have checked alternatives such as selling, premium-free status or withdrawal. Especially older policies with high guaranteed interest rates, or where withdrawal is possible, should not be cancelled hastily.
Do I have to pay tax on the surrender value?
It depends on the contract conclusion date. For contracts before 2005, the payout is often tax-free. For newer contracts, the return (difference between the payout and contributions) is usually taxable, although there may be tax benefits for longer terms and payout in retirement.
