Although no one with a family and financial commitments should be without a life policy, there may come a time when circumstances force you to let your policy lapse.

While this should be avoided if at all possible, the confusion about what happens when you cancel a life insurance policy can make the situation worse. Knowing the rules may in fact help you to hold on to it.

To get a clear understanding of the procedure you must be aware of the fact that there are two types of life cover available, one with a fixed term and the other for life. Both policies can have investment portions attached to them. A term policy has a fixed term (usually 20 years) determined by you. Usually it runs to coincide with an event such as the completion of your bond repayments or retirement. The same rules of cancellation apply to both types of cover.

When do they cancel your policy?

If you cannot pay the monthly premiums the insurance company will use the cash value of the policy to continue to fund the monthly premium. Once that has been exhausted they will try and debit your account. If your policy falls three months in arrears they will cancel it. In this period they will make a concerted effort to get you back on track.

If you cancel the policy early you are liable for the costs of the entire term. These costs are taken out of the investment portion that has accrued to you. This is why you get very little, if anything, back if you cancel in the first two years.

So for example, if you took out a 20-year policy five years ago and decided to cancel it today you would be liable for the costs of the remaining 15 years. So if the investment portion was worth R18 000 in actual rand value you may only get back R9 000. Every assurance company has a different way of handling a cancellation, so this is a ball park figure.

You gotta keep 'em separated

The best way to prevent these losses is to keep your life assurance and your investments separate. The benefits are two-fold. Firstly, a pure life insurance policy with no investment attached is relatively cheap, so if you fall on hard times it should be possible to keep up the payments. Secondly, if you cancel your life policy for any reason you do not compromise your investments. It is also much easier to keep track of your investments and if you go through difficult period you can simply stop paying into them until you are back on your feet.

Of course the best way to prevent a loss on any insurance policy is to make sure that you can afford it in the first place. Make sure that when you sign on the dotted line you can comfortably afford the payments.