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Cancel your life insurance? There are better alternatives

20.08.2025

Life is in a constant state of flux. Which means that goals, wishes and needs can change over time. That’s how it was for our case study Lukas, who wanted to cancel his life insurance policy to save on the premiums. At first, he was unaware that he would not only lose his insurance coverage and fall short of his savings goal, but that he could also face tax consequences. In addition, his financial situation may need to be reassessed to determine the affordability of his existing mortgage. But what alternatives are there?

At a glance

  • Premature cancellation of your life insurance terminates your insurance coverage and can lead to financial losses.
  • Alternatives such as reducing benefits and thus also reducing premiums, pausing premium payments, partial redemption or taking out a loan often offer better solutions.
  • The redemption value depends on various factors, such as the type of life insurance (risk or endowment insurance), the contract term, the premiums paid so far and the costs that have not yet been amortized. A specific calculation of your policy’s redemption value will tell you more about your expected payout.
  • If you took out a life insurance policy in connection with a mortgage, cancelling your policy can have a significant impact on your retirement planning and financial situation.

Do you have any questions about your life insurance? Arrange a personal consultation now.

Find out more now

Five years ago, with a view to making provisions for later in life and reducing the financial consequences in the event of disability, while at the same time providing security for his loved ones in the event of his death, Lukas took out a life insurance policy with the benefits needed to cover his goals. After his wife Valeria recently became self-employed and he reduced his working hours to be there for the children one day a week, the family decided to cut back their expenses. That’s why Lukas wanted to cancel his life insurance policy.

Why would you want to cancel your life insurance?

There are various reasons you might not want to continue with a contract you have taken out:

  • You no longer need to cover the financial consequences of disability or death.
  • You would like to invest the savings element of your premiums in a solution that may offer higher potential returns.
  • You are in financial difficulties and can no longer pay the premiums.
  • You are in urgent need of liquid assets.
  • Your life insurance is linked to a mortgage and your financing situation is changing.

Tip

If things change in your personal life or at work, it is worth looking into new retirement savings or investment products, adjusting existing solutions or perhaps even terminating contracts, depending on your current needs. This means you should review your individual retirement planning or financial situation on a regular basis. You should also examine tax aspects and potential implications for other contracts, such as home ownership.

Terminating a contract prematurely

Lukas understands that a life insurance policy is a contract for the long term and that you generally pay the agreed premium until the end of the contract term or until the time when the insured event occurs. But because he also knows that he can cancel his 3b life insurance policy at any time, he would like to look into the option of redemption.

Does premature cancellation make sense?

Premature cancellation not only ends your coverage if you have a risk insurance policy, but also prevents you from reaching your savings goal if you have a capital-growth life insurance plan. In addition, it usually involves a financial loss. So before terminating a contract, ask yourself:

  • Do I really no longer need the insured benefits?
  • Do I want to and can I afford to accept a financial loss?
  • Have I looked at all the alternatives to redemption?
  • Is my policy a capital or risk life insurance policy and have I assessed the impact correctly?
  • What are the tax consequences of a premature payout?

Useful to know

Unlike pillar 3b, pillar 3a can only be cancelled in specific cases. You can find out more about fixed and flexible pension plans in our blog post “Pillars 3a and 3b explained: the key differences”.

Calculating the redemption value

The redemption value of a life insurance policy depends on various factors – including its term. The shorter the term at the time of cancellation, the higher the deductions. These deductions include non-amortized costs for drawing up the policy or the advisor’s remuneration. To find out the current amount, Lukas makes an appointment with his insurance advisor. With some providers, the redemption value can be seen in the customer portal. However, you should always request an individual calculation before making a final decision to redeem your policy.

Are the premiums lost?

In most cases, premium payments for risk insurance that covers only the financial consequences of death or disability are “lost”. For premium payments used to build up the savings component, you’re generally entitled to the actuarial reserves – i.e. the savings element of the premiums accumulated to date and any earnings there may be. All costs arising from the redemption that have not yet been amortized are deducted from these reserves. For unit-linked life insurance policies, the current value of the fund constitutes the basis for the redemption value.

Useful to know

Early payout can have tax implications. For example, payout of a 3a life insurance policy is taxed separately from other income at a reduced rate. For one-time financed life insurance contracts, there are certain conditions that must be met to ensure that the payout or income is not subject to tax. 3b contracts may also be subject to tax if you terminate the contract before you reach the age of 60 or if the contract has a term of less than five years. If you have any questions, please contact your insurance provider or your tax office.

Alternatives to cancellation

Because the financial loss involved in a redemption would be quite sizeable and his family situation means that part of the insurance coverage is still needed, Lukas discusses possible alternatives with his advisor. In the “general conditions of insurance” for the insurance contract, he had already read that there are options other than premature cancellation. So they take a look at various possibilities.

  • You reduce insurance benefits to a minimum level that’s acceptable for you in terms of protection against risk. This brings down the premium and leaves you with more money for other things.

  • You exclude insurance benefits you no longer need, which reduces your premium and ensures that you are not spending money unnecessarily.

  • You suspend payment of premiums for one or more years. Your contract must have sufficient funds if you pursue this option. Ask your insurance provider.

  • You stop payment of premiums, and hence your expenses for the policy. The contract usually continues until the end of the contract term on the basis of the redemption value.

  • You withdraw a part of the balance saved to date. The contract continues as normal and you carry on paying premiums. The insurance amount is reduced by the amount withdrawn early.

  • You might be wondering whether you can take out a loan. This is generally possible with redeemable 3b policies. If you meet all the conditions, a loan agreement will be drawn up (including loan interest). Your insurance contract will continue, i.e. your insured risk benefits will remain in place. If the loan has not been repaid by the time the benefit is paid out (death or maturity), it will be offset against the payment amount.

In the end, Lukas adjusted the policy with his insurance advisor so that both the premiums and benefits are in line with the family’s current situation. Lukas is pleased with the outcome, and Valeria is too. This way, they continue to save for old age while the family is still protected.

Cancelling life insurance prematurely: what you need to know

  • Premature cancellation of your life insurance almost always involves financial losses.
  • If you cancel, you lose your insurance coverage. In terms of protection for your family, for example in the event of death or disability, this can have major financial consequences.
  • If you terminate a contract prematurely, you will not achieve your specified savings goal.
  • If you take out a new policy at a later date, the rates set will reflect your age at this point. In terms of risk benefits, state of health is also relevant.
  • There are many alternatives to redemption of a life insurance policy. Make sure you look into them.
  • You should also check whether your policy is linked to other contracts (e.g. a mortgage) or whether your tax benefits will be jeopardized by the redemption.
  • In any event, a consultation with your advisor is always recommended. Together you will find the best solution for your current situation.
Find out more about life insurance from PostFinance
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