The Bad Way to Cancel
If you cancel your car insurance policy before the term is finished there usually won’t be a fee, in the sense that if you cancel early you will pay $x amount of dollars. However, you will be penalized in the sense of the amount of refund you are entitled to get back. Each insurance company charges a different cancellation rate which is called a short-rate cancellation and varies between insurance companies. But it basically aims to take more of your insurance premium than the days in coverage you have received. If that doesn’t make any sense, here’s an example.
Say your insurance premium for a year is $1,200 and you decided to cancel your insurance policy exactly six months into the policy term. In a fair world, you would get a refund of $600 or half your annual premium. However, insurance companies adjust the rate to which they calculate your cancellation so that you may only get back $300 or 1/3 of the total premium you’ve paid. So rather than having a nominal fee for cancelling early, you are penalized as a percentage of your refund -which varies form insurer to insurer.
The Good Way to Cancel
So how can you avoid being cancelled short-rate? We’ll you really can’t without a good reason and by good reason I don’t mean that you lost your job or there was a death in the family, but that the reason is a pre-approved reason the insurance company allows for what it is called a pro-rata cancellation.
A pro-rata cancellation is the fair cancellation we talked about in above example where the premium you paid is directly correlated to the days of coverage you received right up to the cancellation date. Now the two main reasons insurance companies approve pro-rata cancellations are as follows:
(1) Total Loss
If your vehicle is involved in an accident and is deemed a total loss by the claims department than you are entitled to a pro-rata cancellation with an effective date to the day after your car was in an accident.
(2) You have coverage elsewhere
Say you get insurance with one company and then three months later find coverage with another company at a cheaper rate. What you can do is cancel your previous policy on the same date your new policy takes effect. You must however show your insurance company proof of the new coverage such as the declaration form from your new insurer showing the start date your coverage begins with them.
Okay I know I said there was only two reasons, but depending on your circumstances and how good at persuasion you are, you may be able to get a pro-rata cancellation for some “off the books” explanations. But it would be very difficult and I would say 99.9% of the time your request for a pro-rata cancellation will be denied. But hey knowing that you can buck the system that 0.01% of the time is all you may need to save some money.