The controller must have thought you were in VMC conditions, and assumed that you wanted to cancel IFR. Sounds like mis-communication.
Yes, when ATC says, "radar service terminated" it means that they are no longer providing traffic info, but your IFR is still active. They will usually say "switch to advisory frequency" just after this.
If ATC says "squawk VFR", you just lost your IFR clearance. Jump on the radio and say "UNABLE. Currently IMC".
Continue the approach as directed, and after you land, call up and close your IFR flight plan. If you need to go missed, follow the missed procedure and switch back to ATC when appropriate (e.g. Seattle Center, Seminole 123AT back with you on the missed, Salem")