What happens if you cancel a term insurance policy?

In general, if a person cancels any life insurance policy, he loses the risk coverage.

A life insurance policy can be cancelled within 15 days(cooling off period) of receipt of physical policy, & get a refund of premium excluding tax, stamp duty etc.

After the cooking period, a “regular premium paying term life insurance policy” cannot be cancelled. If you do not want to continue the term life insurance policy, you can just leave it unpaid.

A “single premium term life insurance policy” can be cancelled even after the cooling period. You can surrender the term life insurance policy anytime within the term of the policy. The late you surrender, the surrender value will be less.

The same effect in a “limited premium payment term life policy”

The same effect in a “return of premium term life insurance policy”.

Are there penalties for canceling a term life insurance policy?

The short answer is NO.

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The longer answer is more of a “depends on what you call a penalty” sort of “no”. If you have a standard term life policy and cancel it, the policy ends on the last day of coverage per the dates set by the last premium payment. This is the same with any life insurance; whether it is term or any variety of permanent insurance. The “penalty” you’d receive for canceling certain policies are called “surrender costs” and usually extend through the first 10 years of a policy.

For example, if you have paid into a indexed universal life policy for 7 years and decide to cancel it, it is unlikely that you will receive the full amount of CV within a policy because it would be reduced by the surrender costs. These usually diminish over the course of the first 10 years.