Technically, you are allowed to cancel your insurance policy at any time. There’s nothing in your agreement that states otherwise. You could be dissatisfied with the service you are receiving, or maybe you found a better price elsewhere. Whatever the case, you’re looking to cancel – but if it’s not renewal time, will there be penalties?
While it depends on the circumstances and your provider, most insurance companies will charge what are known as “cancellation fees.” In this article, we go over why it might be worth your time to consider your reasons for cancelling before doing so, and what might be the potential costs of doing so if it isn’t renewal time. You can always discuss cancelling with your friendly Excalibur Insurance broker and have them review your personal circumstances so that you have additional insight into whether the choice you are planning to make is the right one.
Common Reasons for Cancelling an Insurance Policy
There are numerous reasons why someone might cancel an insurance policy. Whether it’s an auto, home, renters, or another type of policy, you might choose to cancel because:
- You are unhappy with the customer service that you receive from your existing insurance company or do not like the way that claims are dealt with.
- You have found a lower price elsewhere.
- You have downsized (from a home to an apartment) or no longer have a car and therefore no longer require insurance.
- You have chosen to bundle policies and have cancelled a policy with one provider to have two or more through the same carrier.
- You do not like the price you are paying for your current policy.
There are many valid reasons why you would want to cancel an insurance policy. Depending on your circumstances, this can be the right decision for you – or you may want to take some time to consider it before doing so. Here’s why.
Potential Ramifications of Cancelling an Insurance Policy Early
You may consider cancelling your insurance policy at renewal time, which enables you to explore other options, but it also saves you from having to pay any cancellation fees or charges. You can always cancel mid-term, but doing so may subject you to cancellation fees. The exact fees will vary depending on the terms and conditions that are listed in your agreement, and the price may fluctuate depending on when you choose to cancel (as well as the circumstances.)
Note that you may lose any potential discounts if you cancel or switch policies mid-term. If you had a trusted or loyal customer discount, you would lose that. Accident forgiveness may also be lost, in addition to any provider-specific discounts. Moreover, if you are setting up a new policy with a new provider, you may be required to pay a down payment, administration fees, etc.
How do insurance cancellations work?
There are two types of insurance cancellations: “short rate” and “pro rata.” Standard insurance policies will have a 12-month term, which is referred to as the “policy period.” When you purchase an insurance policy, you are entering into a contract that lasts the length of the policy period, with the option to renew at year-end. The agreement goes both ways: you agree to pay your premiums for the 12 months, and your insurance company agrees to maintain coverage during this time. If you cancel your insurance policy before the contract is over, your policy will be cancelled “short rate” and will be subject to a short rate cancellation policy.
The short rate cancellation fee will be a percentage of the total insurance premiums for that year, which is typically higher than the amount would be per day. It’s referred to as a “fee,” but it’s not a flat fee. Short rate cancellation fees are calculated based on the total amount owing to the insurance company at the time that the policy is cancelled – i.e, the earned premium in addition to the short rate cancellation penalty. Every insurance company has their own specific short rate cancellation tables that they use to calculate how much is owed for the insured’s “time on risk.” As an example:
- A $500 12-month policy that was cancelled after 30 days may be subject to a 10% short rate cancellation penalty. In addition, the formerly insured owes around 17-20% of the total policy premium, depending on the insurance company’s short rate cancellation table.
However, with a “pro rata” cancellation, you do not owe a cancellation fee but solely the earned premium during the time that the policy was valid. If a policy is cancelled “pro rata,” it’s because the insurance company is cancelling – not you. Insurance companies can cancel policies for any number of reasons, including the following:
- If they stop servicing a certain location
- If they stop providing a certain product
- You are no longer eligible for coverage under a policy that already exists
- There was a material change in your risk
A full refund is issued in most cases of “pro rata” cancellations, where any unearned premiums are refunded. If the policy was paid in full when set up, the insured will receive half of the premium refunded for the time that they were insured.
After an Insurance Policy is Cancelled…
Short-rate cancellation fees exist to help offset administrative costs when setting up a new insurance policy, which helps the insurance company to not lose money. Note, however, that once an insurance policy is cancelled, your monthly payments may not stop immediately and will take between 5-10 days. If a payment is due in this time, this money may still be taken from your account.
If you have paid more towards your insurance policy than you owe for “time on risk,” you may receive a cancellation refund upon cancellation. If the opposite is true, you will owe the insurance company for the total difference.
In the end, it’s important to consider your options. Is it truly worth cancelling your insurance policy mid-term, or can you wait until renewal time? If you are considering switching because of the savings you will receive, note that cancellation fees could offset the total amount you will end up saving. Whenever you are looking to make a big decision regarding your insurance, consult with your broker. They can give you expert insight and advice based on your circumstances.