#77 How do you cancel a life insurance policy?

Many people take out life insurance at a young age because they’ve been made aware of a looming retirement savings gap. To cover this gap, a so-called unit-linked life insurance policy is often recommended. It combines insurance coverage with investment funds.

Where the money you’ve paid in actually goes

Anyone who checks the current cash value of their policy after a few years is often surprised to find that the amount is much lower than the total of all premiums paid so far.

If you upload such a policy to an AI like ChatGPT or Claude for analysis, the reason quickly becomes clear. The regular payments do not go entirely toward building wealth, but rather into various channels:

• Insurance coverage: A portion of the premium finances the pure risk (e.g., death or disability).
• Acquisition costs and commissions: A significant portion covers the commission that the broker receives after the policy is issued.
• Administrative costs: Another portion covers the insurance company’s administrative fees and its profit margin.
• Investment: Only the remaining amount is actually invested, often in overpriced mutual funds with annual management fees well over one percent.

The two ways to exit the contract

If you determine that continuing the policy is no longer worthwhile, there are essentially two ways to exit the contract:

1. Premium waiver

You stop making premium payments immediately. A premium waiver should always be submitted in writing and signed by hand, as it constitutes a formal contract amendment. Many Swiss insurance companies accept submission by mail, as a signed PDF via email, or through their customer portal. It is advisable to request written confirmation, including the newly calculated guaranteed and benefit amounts.

The capital accumulated to date remains with the insurance company and continues to grow until the end of the contract. In return, the insurance coverage is reduced accordingly. This option is suitable if you do not want to make any further contributions but also do not wish to realize the current surrender value immediately.

2. Termination (Surrender)

You terminate the contract entirely and have the so-called surrender value paid out to you. While this results in a one-time loss, in the long term, however, this is still worthwhile in most cases because you can then invest the paid-out capital independently, transparently, and cost-effectively in the capital market.

Why fees are charged upon termination

Many policyholders wonder why additional deductions are made upon termination. The insurers’ explanation is usually «unamortized acquisition costs.» This means that the high sales commission and other costs have not yet been fully paid off through the premiums in the first few years. They are normally amortized over the entire term of the contract. In the event of early termination, the insurance company demands payment of the outstanding amount or deducts it from the so-called coverage capital.

Despite these costs, a consistent exit is often the most financially sensible decision. As a general rule in financial planning, you should strictly separate insurance from savings. This is significantly more cost-effective, transparent, flexible, and usually more lucrative as well. You can learn more about the differences between a pillar 3a savings policy and a pillar 3a investment solution in our blog: Apparent security: the hidden costs of pillar 3a savings policies

Important for new policies: the 14-day cooling-off period

Have you recently signed a life insurance policy? According to the Swiss Insurance Contract Act (VVG), you have a statutory right to cancel the policy within 14 days of receiving it. During this cooling-off period, you can cancel the contract free of charge without providing a reason.

Tip: Whether withdrawing within the 14-day period or terminating the policy later through ordinary cancellation, you should always notify the insurance company by registered mail.

Key points at a glance

Mixed life insurance policies combine two objectives that can usually be achieved more effectively – and, above all, more affordably – when pursued separately.

For example, healthy individuals can take out a pure term life insurance policy for a few hundred francs per year. Of course, the exact premium also depends on the required death benefit and the policy term. It’s worth taking stock of your finances and comparing a few providers.

Do you have a mixed life insurance policy? Have you ever had your policy analyzed by an AI or an independent expert? Feel free to share your experiences with me via email.