Cancelling Life Insurance: A Guide with Templates and Expert Tips for Maximising Your Payout
16 May 2025
11
Minutes
Katrin Straub
CEO at nextsure
Are you considering cancelling your life insurance policy? This decision requires careful thought as it can often lead to financial losses. We will show you how to proceed and explore the options available to make the most of your situation.
The topic in brief and concise terms
Cancelling a life insurance policy often results in financial losses, as only the surrender value is paid out, which is usually less than the premiums paid.
Alternatives such as selling, premium waiver, or revocation (especially for contracts from 1994-2007) may be financially more advantageous than a cancellation.
A revocation can also be possible years later in the case of incorrect information and can lead to the repayment of all contributions plus interest.
Cancellation of Life Insurance: Understanding the Basics
Terminating a life insurance policy ends your contract prematurely. You will then receive what is known as the surrender value. This value can be significantly lower than the total of your paid premiums, especially in the early years. This is because initial and administration costs, as well as a possible cancellation penalty, are deducted. Many policyholders underestimate the extent of these deductions, which are often not recouped until after five to ten years of the contract term. Therefore, termination should never be the first option without examining alternatives. The notice period is usually one to three months before the end of the current insurance period. It is important to check the exact conditions in your contract or inquire with your insurer. Consider also whether you might opt for a modification of old contracts.
The surrender value: What you actually receive
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 paid contributions, the contract term, the profits generated, as well as the aforementioned charges and cancellation deductions. Insurers are legally obliged to inform you of the current surrender value in the annual 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 or even zero in the early years of the contract. Before you cancel your life insurance and expect to get money back, you should check this value carefully. You can find the exact calculation method in the general terms and conditions of your contract.
Alternatives to Termination: Better Options for Your Money
Before you consider cancelling your life insurance and potentially incurring financial losses, you should explore various alternatives. These can often be more advantageous. One option is to make your policy non-contributory. In this case, you stop paying premiums, but the contract remains in place and the accumulated capital continues to earn interest, although the eventual payout will be lower. Another possibility is selling your life insurance on the secondary market. Here, you might be able to secure a purchase price that is three to four percent higher than the surrender value. Pledging the policy is an option if you need short-term cash; your insurance coverage remains but incurs credit interest. Reviewing a cancellation can be particularly lucrative if your contract has errors in the cancellation policy. Here's an overview of the most common alternatives:
Non-contributory: No further payments, contract continues with reduced value.
Sale: Potentially higher proceeds than the surrender value, but market for policies from about 5,000 euros in value.
Pledge: Short-term liquidity, insurance coverage remains, interest costs apply.
Cancellation: Often possible even after years if there is faulty advice, repayment of all contributions plus interest.
Partial cancellation: Not always possible, payout of part of the surrender value, contract continues.
The decision largely depends on your individual situation and the contract details. Making a capital life insurance non-contributory is often a worthwhile alternative.
The Revocation: An Often Overlooked Opportunity for More Money
Revoking your life insurance can be financially much more attractive than cancelling it. This is particularly true for contracts concluded between 29 July 1994 and 31 December 2007. Many of these policies contain incorrect cancellation instructions, which can justify a "perpetual right of objection". If a withdrawal is successful, the contract is treated as if it never existed. You will then not only receive your paid premiums back, but also the interest earned by the insurer and all fees. This can lead to a payout that amounts to up to 150 per cent of the paid contributions. Even if your contract has already been cancelled or expired, a withdrawal may still be possible. It is advisable to have your contract checked by experts for free before submitting a cancellation. Also consider the tax aspects if you have to cancel a private pension insurance and pay taxes.
Sample letter for cancelling life insurance: How to formulate your letter
If, after carefully considering all options, you have decided to terminate your life insurance, you will need a formal termination letter. This should definitely be done in writing and sent by registered mail to provide proof of delivery. A simple termination letter should contain at least the following information:
Your full name and address.
Name and address of the insurance company.
Your life insurance policy number.
The current date.
A clear statement that you wish to terminate the contract at the earliest possible date. (e.g., "I hereby terminate my life insurance policy with policy number [] in due time at the earliest possible date.")
A request for confirmation of the termination and notification of the payout amount and the payout date.
Your bank details for the payment of the surrender value.
Your handwritten signature.
Ensure you comply with the notice period, which is mostly one to three months before the end of the insurance period. A template can be helpful, but always adapt it to your individual situation. For calculating the life insurance tax, a calculator can be useful.
Expert Tips: Legal Aspects and Recent Judgments
The Insurance Contract Act (VVG) forms the legal basis for the termination of life insurance policies. § 169 VVG, for instance, regulates the entitlement to the surrender value. For contracts concluded under the policy model (concluded between 1994 and 2007), the Federal Court of Justice (BGH) has strengthened the rights of policyholders in several rulings (e.g., Case No. IV ZR 76/11), particularly concerning the right of objection in cases of incorrect information. The European Court of Justice (ECJ) has also confirmed this indefinite right of objection. Our expert tip: Be sure to have contracts from this period checked for the possibility of withdrawal, as often several thousand euros more can be achieved compared to a termination. After an insurance event (claim incident), both policyholders and insurers can terminate the contract within one month after the conclusion of negotiations regarding compensation (§ 92 VVG). Also find out how long a life insurance policy lasts.
Tax Treatment of the Payout: What You Need to Know
The tax treatment of the surrender value depends on when the contract was concluded. For contracts concluded before 1 January 2005 (old contracts), the payout is tax-free under certain conditions. This typically includes a minimum term of twelve years and a contribution payment period of at least five years. For contracts concluded from 1 January 2005 onwards (new contracts), the profit – that is, the difference between the payout and the contributions paid – is generally taxable. If the contract has run for at least twelve years and the payout occurs after the age of 62, only half of the profit must be taxed at the personal income tax rate. Otherwise, the full profit is subject to a final withholding tax of 25 per cent plus solidarity surcharge and, if applicable, church tax. As a termination often results in no real profit, but rather a loss, in many cases little or no tax is due. It is best to clarify your individual tax situation with a tax advisor. This is also relevant if you are considering converting a term life insurance policy.
Cancel Term Life Insurance: Special Aspects
Conclusion: Carefully weigh your options
More useful links
Destatis offers a press release on the "Number of the Week," which relates to life insurance policies.
Destatis explains the term "insurance credit" in the glossary in the context of insurance.
The Federal Ministry of Finance provides information on the tax treatment of life insurance policies.
Under Gesetze im Internet you can find the full text of the Insurance Contracts 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?
Submit a written notice of termination with your insurance number, the desired termination date at the earliest opportunity, and your signature by registered mail to your insurance company. Please note the notice period.
Will I get any money back if I cancel a term life insurance policy?
No, a term life insurance policy does not have a surrender value because it only provides coverage in the event of death and does not accumulate any capital. When terminated, the insurance coverage ceases.
Is cancelling my life insurance policy better than terminating it?
Often yes. A revocation, particularly in contracts with faulty revocation instructions (often concluded between 1994 and 2007), can result in a significantly higher payout because you can receive all contributions plus interest back.
What costs arise when cancelling a life insurance policy?
Upon termination, acquisition and administration costs, as well as often a cancellation fee, are deducted from the accumulated capital. This means that the surrender value is usually less than the total of the contributions made.
When should I not cancel my life insurance?
You should not terminate your contract before exploring alternatives such as selling, premium exemption, or withdrawal. In particular, older contracts with high guaranteed interest rates, or where withdrawal is possible, should not be terminated hastily.
Do I have to pay taxes on the surrender value?
This depends on the contract conclusion date. For contracts before 2005, the payout is often tax-free. For more recent contracts, the income (the difference between payout and contributions) is usually taxable, although there may be concessions for long-term duration and payout upon reaching retirement age.
