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.