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Early Cancellation of Your Auto Policy: Things to Consider Before You Cancel

March 6, 2012

Whether you are unhappy with your rates or with some other aspect of your car insurance, changing to a new company is always an option. Before you make the switch, however, you should be sure you know exactly how much it will save you as well as how much it might cost you. Insurance companies sometimes charge penalties for early cancellation, and you will have to consider any fees or down payments required by the other company as well. Consider all of the costs before you make the switch.

Cancellation Penalties: Short-rating and Pro-rating

Insurance companies handle cancellations based on terms laid out in the policy when you sign up. Early cancellation involves administrative costs as well as the loss of the premiums which are rated based on the full term of coverage, usually a year. Each insurance company has their own policy regarding cancellations, and the penalties often vary based on when and why you cancel.

There are two basic methods by which auto insurance companies process refunds on a cancelled policy: short-rating and pro-rating. A pro-rated cancellation gives you back the full amount of the unused premium, while a short-rated cancellation takes a certain amount out of the refund as a penalty for early cancellation. If you have a 12 month policy and cancel after 3 months, you will get back 9 months worth of premium on a pro-rated system. If the company is short-rating the cancellation, you will lose some of that remaining premium. The amount depends on the company’s policies. Short-rating may only occur early in the policy term or may apply at any time.

Before you cancel, ask the company which method they will use and find out how much money you stand to lose in a short-rating situation. You’ll need this information to determine whether the savings on your new policy makes up for that difference.

Starting a New Policy: Fees and Down Payments

When you start up a new policy, there are usually costs associated with it. Insurance companies charge administrative fees for starting up a new policy, and they often charge a down payment as well. This means that in addition to any money you might lose on the cancellation of the old policy, you will have to pay these costs up front. Be sure to find out what they are and how much money you will need to put down at the start of the new policy so you don’t have any surprises.

Of course, these costs are a normal part of starting up a new policy, and even with them taken into consideration, you might still be saving money by switching right away. If the new premium is significantly lower than the old one, then it is usually the right move.

When to Shop for Car Insurance

Shopping around for your car insurance when your renewal is approaching is usually the best time and will help you avoid cancellation penalties. Cancelling on renewal gives you a smooth transition into the new policy.

However, if you are really not happy with your current rate or policy, you should take the time to shop around for rate quotes right away. Comparing rates will tell you if you really are overpaying, and by how much. If you find a lower rate, it’s simply a matter of adding up the costs of cancelling early and the costs of the new policy, and weighing them against the savings on the premiums. Calculate how much you will save over the policy term on premiums alone, and subtract from that the costs of early cancellation. If you still come out ahead, then cancelling right away is the right choice.

There’s no obligation to shopping around for car insurance, so getting some quotes to compare to your current rate won’t cost you anything. It’s a good way to keep tabs on what other companies are charging and make sure you aren’t paying more than you should be.

Cancelling your policy mid-term may be the right choice for you, or it might make more sense to wait until renewal. Make sure you get all of the information you need before you make a decision, and look at all of the costs and the savings. Knowing how much you actually stand to save makes the decision an easy one.

  • Peter P

    I have used insurance hotline once before and saved a significant amount on my auto insurance. Last summer I brought a brand new minivan and my annual premium increased significantly. I thought it was okay with the vehicle being new. However, on renewal this year, there was a substantial hike. I got a quote from insurance hotline that was saving me a 1000 dollars to what I was currently paying. Thank God for Insurance Hotline!

  • Nick – InsuranceHotline.com

    That’s great Peter! We’re happy to help you save time and money!

  • Not impressed

    I won’t mention any names but I recently put a car in my daughter’s name and the insurance company I have been dealing with for years initially quoted me something like $1,580.00 and when the bill came in it was $1,830.00.

    I checked on line and another insurance company and they offered me the same coverage for $1,472.00 and then called me to tell me that they had made a mistake and since my daughter had only been driving for 5 and not 6 years that I would incur some additional costs. When asked how much, I was told in the vicinity of $160.00 which I accepted.

    I got the final bill, and you guessed it it was higher than I thought, much higher as a matter of fact… total due now almost $1900.00.

    Upset you say… considering that I had to pay over $330.00 to cancel my initial policy, and bearing in mind that the insurance company was provided complete and exact information, I am at a loss to explain why I have to bear the added costs… it was not me that made the mistake in either instances.

    I am already looking for a new insurance company.

  • http://www.joecrawfordlive.com Joe Crawford

    I saved a whole lot of money by switching…….my car into reverse and driving away lmfao (it’s a joke you insurance companies. Calm the Hell down)

  • disqus_zF0T19pfMu

    what is the maximum administrative fee allowed by insurance companies when termination of policy ?

  • shocked

    I cancelled a car insurance policy with 24 hours and am being charged 10% of the six month rate plus one days worth of coverage. Is this legal?

  • not happy

    How do you find out which system you insurance company uses? We were told half of the monthly payment. Does this seem fair?

  • Susan Scharf

    Try going to Infinity Insurance. I went from paying $780.00 to $462.00 a year. $38.82 a month.

  • kattie

    i am adding my kid’s name in insurance premium went from 125-490 in the middle of my old contract.i did some research on hotline and found better rate.i dont know my old company will charge me penalty for canceling policy… how much?and can i cancel my kids name from old insurance and find new one for him seperately?

  • excited

    Not cancelled but want to renew my insurance before the due date . is it to do that ? My due date on may 20 /2015 now is may 14/15 I don’t know if it okay to renew it before the expiration

  • Shane Zwicker

    Name names… Nobody cares about your daughter’s name or yours but if there’s insurance companies out there that people should steer clear of then you should put a name to that company. It’s not like you signed some non-disclosure agreement with them or anything and I doubt you will hurt their feelings.

  • concerned ontarian

    i am in the same situation. they also took a month to cancel our policy from the date they initially withdrew. i am thinking about getting that charged reversed through my credit card company but am scared of any repercussions. thoughts?

  • Lexi

    They’re a terrible company. They quoted my finacee $156 a month and after the THIRD payment changed the rate to $388 a month. After cancelling they tried charging another $280 in “cancellation fee’s”. TERRIBLE COMPANY!

  • Ginger Themov

    I recently signed up with an auto insurance company for a new policy. even though I specifically told the agent I needed rental coverage, she signed me up for an unknown company to me- Dairyland insurance? I put down my deposit, thinking it was with my previous company, (the agent did not tell me it was a different company) but that afternoon when i got the policy details in writing I realized they could not cover any rentals so i went to my previous company and resigned with them. I wrote Dairyland a request to cancel my policy because of their lack of adequate coverage. I initially paid $380.00 as down payment but they informed me that early cancellation requires a fee of $140.00! that seems very steep to me considering it was the agents fault for misrepresenting my coverage and also because I cancelled within a day of signing the policy. Is this normal? who regulates the fees they charge? and can I do anything about it? I am upset and feel ripped off! help thanks.

  • InsuranceHotline

    You should contact Dairyland’s ombudsperson. You should be able find their contact information on their website or the agent should be able to give you that info.

  • Cheryl Brunet Long

    StateFarm! Not a good neighbour.

  • Shane Zwicker

    Do it. If you feel that you are in the right then you should do it cuz big companies rip off the little guy way too much. Goodlife fitness did the same thing to me, I ultimately ended up calling their head office to arrange a refund of my “stolen” money.

  • Eric Verkuyl

    I’ve been forced to cancel my car insurance after being branded as a high risk driver in 2015. I drove from 1999-2014 without an accident and 2 minor tickets for 15 years, but in 2014 I was nailed for not coming to a complete stop at a stop sign and the insurance card I had in the glove box was expired (I had forgot to put the new one in). Then I rear-ended someone in January of ’15, slipping on ice and had to file my first ever claim. My insurance company (economical) wouldn’t renew me in 2015, and now I’m branded as high risk. I was trying to make the $350/m insurance premium payments, even though the only coverage I had was liability, but in the end I had to cancel. Paying $4000 a year for a car that’s worth about the same is insane to me.

    So now I’m selling my car, walking to work, and hoping my spouse can do most of the driving until my record is clear.

    Here’s the question though. Should I put myself on as an occasional driver on my spouses vehicle or should I ride out my sh*tty abstract for the next 2 years and restart

  • Crystal Elizabeth White

    I had allstate insurance and cancelled it! than they still took my payment of 330 than they said that I should have put a stop payment on it. than they said I would get a cheque sent to me with the money they took. they said that the company may do that because we are on the payee list now I called them today and they said that we are not getting money back but we are getting a cheque from our premium and cancellation of 140.00 so the first and last month and an extra payment and all I get back is 140.00 out of about 500 and I only had insurance with them for 2 months. I called a 1 800 number and she told me that my allstate branch was wrong cause I owed trhat payment cause they did not cancel it on the Friday like they said they would they made me rush in on Friday afternoon and sighn papers of cancelaation I did that and got new insurance apparently it was not done till the Monday 2 days later in the system so I paid this month cause they took it and I have no policy with them or else id crash the dam car and make them pay. and they said that’s the way it goes if im not happy call the ombudsmun cause all my money is in penalty ummmmm I am livid

  • Thamy Darwish

    Insurance are the most corrupt things, ever. End of story. You’d think by buying a honda civic for 2 grand, you could save enough on your own to pay for an accident, since a new driver’s insurance costs 300 a month, Literally paying more than the cars worth in a year. But nope, insurance is REQUIRED ( obviously for profit purposes) and there basically no government regulation/ rules on insurances and banks for that matter. I just cancelled my coverage, and somehow there is a premium that they keep for cancellation. A premium of 300.00. I’ve never even heard of premium services, i literally have one way insurance and it costs more than my monthly pay cheque as a student. Now that is just rude. And they are not broke, they are capable of lowering their prices and still maintaining profit, but the greed is what gets them hated by every single new student driver that can’t put their car under their parents name. I don’t even know where the premium cancellation fee is going to. I hope its going to some fat chump at the top of the chain and feeds him more food just so he can get diabetes. Man this world we live in is shit.

    Sincerely, a broke student who hates the corruption of unreasonable capitalism falling upon them.

  • Projekt Kobra

    I just got royally boned by BellairDirect…200 bucks to cancel a car policy I had for a month.

    Its mostly my own fault though,..its my parents company, and I needed a policy straight away to get up to see The Girl..but them my brother chimes in AFTER I sign up..”Oh if you use MY guys, they give a bonus for uni grads and take into consideration whole driving record.” (I had a period with no license when I lived overseas)…so I switched over..but I got dinged for this BS admin charge.

    Ugh…so I will spend the rest of my days not recommending them…cuz come on..200 bucks for what?..typing?

  • Ashley Andrade

    Urgh same here only I had my policy for 2 days and they charged me $100! The policy technically still doesn’t start for another 5 days! How can you be charged for cancelling something that doesn’t exist?

  • Projekt Kobra

    To me the worst is the “learning experience” nonsense…My brother told me about his cheaper insurer, AFTER I had already gone with Bellair…he KNEW I was buying a car…thanks for the big heads up there!

    Well..frankly…you cant expect people to hold your hand every step of the way through life…nobody TOLD me that I’d get dinged for more insurance if I let my licence lapse..cuz…nobody lives overseas for 8 years and lets their license lapse!!!…so nobody HAS that experience….except ME…and I dont have that many friends or family with whom that topic MIGHT come up..

    My brother is a corporate big shot..he has a lot on his plate..remembering that there are different insurers for his pesky kid brother isnt high on his list of important things to DO today..I admit.

    But it still p-ees me off.

    BTW youre frigging cute…or at least your avatar is! >_<'